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NIO (NIO) is among the most popular and volatile electric vehicle (EV) stocks. The company listed on U.S. markets in 2018, and by early 2020, it raised a red flag over its ability to continue as a “going concern” - which is often a boilerplate warning before a bankruptcy filing.
It appeared to be the end of the road for NIO in Q1 2020, and bankruptcy seemed imminent as the COVID-19 pandemic made the road even tougher for the carmaker. However, NIO managed to raise cash from strategic investors, and the Chinese government also pooled money to bail out the struggling company.
NIO Stock Has Performed Poorly Since February 2021
NIO enjoyed the rally of a lifetime as it rose over 1,100% in 2020. The rally stretched into early 2021, when the shares hit an all-time high of $62.84 in February. However, the shares eventually closed in the red for 2021, and continued to decline the next year, as well.
NIO shares are down 19.5% YTD in 2023, while fellow Chinese EV names like Li Auto (LI) and Xpeng Motors (XPEV) are in the green - and even U.S. rival Tesla (TSLA) has gained 77% on the year, even as the Elon Musk-run company is still considerably below its November 2021 highs.
Recently, NIO said it would slash its workforce by 10%, citing intense competition in the EV industry. To be sure, there is no denying that the competition in the EV industry – especially in China – has intensified.
Even NIO, which previously denied participating in the EV price war, had to eventually cut vehicle prices to remain competitive. The “Tesla of China,” as NIO was once hailed, is now struggling to justify that title, even as China-based BYD looks set to snatch the crown of largest EV seller from Tesla.
What’s Wrong with NIO Stock and Why Is It Falling?
While the broad-based sell-off in growth names is partly to blame for the sell-off in NIO stock, several company-specific factors are also adding to the downside momentum. These include.
- NIO’s delivery performance has been disappointing, and its monthly deliveries in the first 10 months of 2023 averaged only about 12,600.
- NIO’s gross margins fell to a mere 1% in Q2 2023, after having previously risen to double digits.
- NIO continues to burn cash, like most fellow startup EV companies, and earlier this year raised $1 billion through a convertible note issue. Markets were worried that the company would raise more cash, and NIO had to issue a clarification to the contrary to calm nerves.
It would be fair to say that NIO failed to live up to the high expectations that markets had for the company a couple of years back, even as Chinese rivals - especially Li Auto - have raced ahead in terms of cumulative deliveries.
NIO Stock 2025 Forecast
The near-term forecast looks challenging not only for NIO, but for the wider EV industry. However, things should stabilize by 2025. On the macro level, the EV industry’s brutal price war should normalize, while interest rates globally should be lower than what they currently are.
NIO also plans to enter the U.S. market by 2025, although the company might find itself at a disadvantage in the world’s most lucrative automotive market due to the tax credit rules, which won’t apply to its cars imported from China. With EV buyers increasingly price-conscious, the absence of a $7,500 EV tax credit could hurt NIO’s prospects in the U.S. market.
In terms of margins, NIO expects its gross margins to rise to double digits in the back half of 2023. A combination of higher margins and rising deliveries might help NIO stock rise higher. Also, I believe the risk-reward is stacked in favor of NIO stock, considering its next 12 months price-to-sales multiple of 1.17x is among the lowest in the peer group, with XPEV and LI respectively trading at 2.47x and 1.97x.
Morgan Stanley, incidentally, expects NIO stock to double over the next year - and the Street-high target of $19.20, from Citi, implies expected upside of 141%. While that forecast is much higher than the mean target price of $12.84, given the attractive risk-reward dynamics, I wouldn't be surprised if NIO can more than double from current levels by 2025.
Why NIO Stock Looks Like a Good Buy
NIO has a strong brand in the premium EV market, and has built a robust network of battery-swapping stations. While the company is facing significant headwinds – both on the macro as well as company-specific levels in the near term – it has faced even tougher conditions in the past, but managed to emerge stronger.
I believe that while NIO stock might remain volatile in the short term, it is among the quality names that can survive the current EV industry slump due to its strong brand, attractive product portfolio, reasonably strong balance sheet, and ability to raise cash from strategic investors. The stock can deliver strong returns over the next couple of years, and should trade at a much higher level in 2025 as compared to the depressed price levels that we are currently witnessing.
On the date of publication, Mohit Oberoi had a position in: NIO , XPEV . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
