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NIO (NIO) stock hit its 2023 closing high of $15.46 on Aug. 3 - and after setting an intraday high of $16.18 the next session, the stock's value has since been cut nearly in half. The stock briefly fell below $8 in Monday's session, and is now quite near its 52-week lows. NIO is currently down 45% from that early August closing high, and it's off 48% from that recent intraday peak.
NIO is the most popular Chinese electric vehicle (EV) stock among U.S. investors – or at least, that’s what its trading volumes tell us. Its average 50-day trading volume of 63.5 million shares is three times higher than Xpeng Motors (XPEV), and almost 10 times greater than Li Auto (LI) – which, incidentally, has outperformed its peers over the last couple of years.
As for NIO, is the stock a good buy at current levels, after shedding nearly half of its market cap in less than two months?
Why is NIO Stock Going Down?
Let’s begin by analyzing the reasons why NIO stock is going down. These include:
- There has been a broad-based sell-off in growth stocks, and EV stocks in general have been weak over the last month. Thanks to the recent EV sell-off, Lucid Motors is on the verge of becoming a penny stock, and briefly fell below $5 yesterday – which is the SEC’s threshold for penny stocks.
- Chinese stocks have plunged amid the worsening slowdown in the world’s second-largest economy. U.S.-listed Chinese stocks like Alibaba (BABA) and JD.com (JD) have been hit hard, and JD just hit another new 52-week low today.
- Along with these macro concerns, some company-specific factors have also added fuel to the fire. For instance, earlier this month, NIO completed a $1 billion capital raise through a senior convertible note. There were rumors that the company is considering another round, but it has denied the speculation.
- The company’s Q2 2023 earnings revealed a massive loss, which was much higher than what Wall Street expected.
However, I believe that NIO’s risk-reward looks quite attractive - and even as it might continue to remain volatile in the short-term amid the sell-off in growth stocks, the EV stock offers reasonable value at these price levels. Here’s why:
1. NIO Has a Strong Brand in the Premium EV Market
- NIO has an impeccable lead in the luxury EV market in China. In July, it had a 59% market share in the premium market, with a transaction price of over 300,000 yuan (around $41,150). The company has built a strong brand in the premium EV market, which is among its competitive strengths.
2. NIO's Margins Should Improve in the Coming Quarters
- NIO’s financial performance is expected to improve in the coming quarters as production ramps up. The company has taken several steps to lower costs, and expects its gross margins – which plunged as low as 1% in Q2 – to return to double digits in Q3, and expand further to 15% in Q4. The automaker expects deliveries to stabilize and sustain above 20,000 beginning in Q4, and is preparing its supply chain to support monthly deliveries of 30,000.
- Separately, NIO is also looking to launch ALPS, its mass-market brand, and expects to launch the first model in the second half of next year.
3. NIO Stock Looks Undervalued
- NIO now trades at a next-12 months price-to-sales multiple of 1.24x, which is a significant discount to its long-term average and not far from the all-time lows of 0.79x. While the multiples might not rise to their January 2021 all-time highs of 23x, they nonetheless look quite depressed at these levels. Also, NIO’s valuation multiples are at a discount to peers like Li Auto and Xpeng Motors.
4. NIO Could Partner with Other Automakers
China sees the EV industry as strategic, and the country has especially been supportive of NIO, which it bailed out in 2020 amid the bankruptcy scare. In July, CYVN Holdings- which is majority-owned by the Abu Dhabi government - invested almost $740 million in NIO, which was a testimony to the company’s EV capabilities. Rival Xpeng Motors also bagged an investment from Volkswagen (VWAGY), which not only took a stake in the company, but will now co-develop two models for the Chinese market. With many other global auto companies struggling in China, NIO might look like an attractive partner to some, and any such venture could drive the stock higher.
Responding to an analyst’s question about partnerships with other automakers during NIO’s Q2 earnings call, CEO William Li said that the company is “very open to all kinds of cooperation with peers in the industry.” Li added that NIO is in “initial communications with certain OEMs (original equipment manufacturers)" for opening up its battery technology and charging and swapping networks.
NIO Stock Forecast Looks Positive
Wall Street analysts rate NIO stock as a Moderate Buy. Of the 11 analysts covering NIO, 4 rate it as a Strong Buy while 1 calls it a Moderate Buy. The remaining 6 rate it as a Hold. NIO’s mean target price of $13.01 is 53% above current levels.
While NIO faces several headwinds in the near term, and the company has to improve the trajectory of its sales - which disappointed in the first half of the year - I believe the Chinese EV specialist could offer decent upside in the long term once sentiment toward growth stocks improves.
On the date of publication, Mohit Oberoi had a position in: NIO , XPEV , BABA , JD . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
