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NIO (NIO) stock has lost almost a third of its value from its August highs, and is now up only about 6% for the year – underperforming the broader equity markets, as well as electric vehicle (EV) peers like Tesla (TSLA), Xpeng Motors (XPEV), and Li Auto (LI).
Longer term, NIO has been sliding since its peak in early 2021, and fell sharply in both 2021 and 2022. Previously, it had rallied over 1,100% in 2020 as it proved critics wrong and not only survived a bankruptcy scare, but also looked set to embark on an ambitious growth plan.
NIO is Down Sharply from Its 2021 Highs
Over the last two years, the company’s growth hasn’t been very promising. Its monthly deliveries averaged less than 10,000 in the first half of 2023, and gross margins were a mere 1% in Q2 2023 – compared to double-digit gross margins in the same quarter last year.
The pessimism towards Chinese stocks amid a deepening economic slowdown on the mainland is not helping matters for NIO, either. However, I believe NIO still looks like one of the best ways to play the Chinese EV industry.
Why Nio Stock Looks Like a Good Buy Now
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). That month, NIO’s deliveries rose to a record high, likely due to a preponement of customer purchases ahead of the withdrawal of free battery swapping on new cars from August. Nonetheless, it shows the company’s dominance in the high-end premium EV segment in the world’s biggest automotive market.
Looking ahead, NIO’s financial performance is expected to improve in the coming quarters. Gross margins are projected 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.
The company has also hired many new sales executives to support its growth. Incidentally, NIO does not intend to launch any new models under the Nio brand in 2024, and in September all of its models will transition to the NT2.0 platform, which promises better performance of vehicles.
NIO Looks to Launch a Mass-Market Brand in 2024
Separately, NIO is also looking to launch ALPS, its mass-market brand. During the Q2 earnings call, NIO’s CEO William Li said, “We have just rolled out the verification build of the first model from ALPS, and this model will be highly competitive in its product segment.”
With the first ALPS model expected to launch in the second half of 2024, the mass market offering should help NIO achieve scale and improve deliveries, as well as overall earnings.
NIO Has a Strong Balance Sheet for Cash Burn
Like most fellow startup EV companies, NIO is burning cash. It therefore becomes important for the company to have sufficient cash on the balance sheet – as well as the backing of investors to raise cash if the need arises.
NIO had $4.3 billion of cash and cash equivalents on its balance sheet at the end of June - and in July, it secured additional funding of $738.5 million from CYVN Holdings, which is majority owned by the Abu Dhabi government. The EV company also has tacit support from the Chinese government, which bailed out NIO in 2020 when it was staring at bankruptcy.
NIO Stock Forecast
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 maintains a Moderate Buy. The remaining 6 analysts rate it as a Hold.
Its mean target price of $13.01 is a premium of almost 22% to current levels, while the Street-high target price of $19.20 implies an upside potential of over 81%.
NIO trades at a next-12-month (NTM) price-to-sales multiple of 1.53x, which is lower than Li Auto’s 1.94x and Xpeng Motors’ 2.68x.
Key Risks for NIO Investors
Meanwhile, NIO investors should watch out for some risk factors, as well. The first is, of course, the structural slowdown in China, which accounts for the bulk of NIO’s sales.
Slower-than-expected production ramp-up is another risk for NIO, as in the past the company has faltered on execution.
Finally, Tesla’s relentless price cuts in China might not make things any easier for Chinese EV companies. Even NIO lowered car prices earlier this year in response to Tesla’s price cuts.
That said, NIO still looks like a reasonable buy for investors, given the growth forecast and reasonable valuations. The company might also see interest from auto majors – just as peer Xpeng Motors caught the eye of Volkswagen (VWAGY), which invested in the company and will now co-develop two models for the Chinese market. With many other global auto companies struggling in China, NIO might appear as an attractive partner to some, and any such venture could drive the stock higher.
To sum it up, while NIO’s recent financial performance has been somewhat disappointing and the trajectory of delivery growth has fallen short of what markets were expecting, I believe that the company’s performance should improve in the coming quarters – which will then also be reflected in its stock price.
On the date of publication, Mohit Oberoi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
