Is Nio Stock's Plunge Today a Buying Opportunity?Jul 06, 2022
Much of what we said back in December still rings true for Nio today.
And in case you don't want to re-read the entire analysis, the short of it was that:
At the time of publishing, Nio recently posted their highest pre-order sales ever, revenues were rapidly expanding, margins were improving, they had a massive cash balance, and the future of the company looked brighter than ever.
Nio's new car (the ET5) had its highest pre-order sales ever.
And there were fears that Nio could be de-listed from American exchanges amidst a general market sell-off.
Well fast forward to today, and while the risks are still high, their outlook is as strong as ever.
They've continued to grow and are setting themselves up nicely for the future of EV.
Let's get into the details below 👇
As we mentioned above, while Nio does come with significant risk, they've been executing very well over the last 6 months -- even in the face of serious adversity.
Some of the key areas we're excited about are:
Nio published sales in June of 12,961 units (+85% MoM & +60% YoY). These numbers came in at the high end of the company's target earlier this year and are now expected to grow another 75% by next year! While the company's production facilities did shut down due to COVID, numbers quickly rebounded and are coming back strong.
Nio officially launched the ES7, a mid-sized five-seater SUV. While it may take a bit of time to ramp up sales volume, this signals a new push for Nio towards a family demographic. That's why this car acts as a long-term important strategic initiative rather than a quick direct response financial target.
Nio's Q2 deliveries reached 25,059 units, which slightly topped its guidance of 23k to 25k. Sales and deliveries are very different in the auto world. And in a world, where supply chains are backed-up, selling a car vs. delivering it to that end-user is very different. That's why we're truly excited to see that their deliveries are ramping up faster than expected -- especially after their factories shut down earlier this year.
So while all of these executional capabilities are impressive now, we need to also understand how this will affect investors' perception of them going forward.
And while we're still bullish on them in the long run, we believe Nio will need to see more meaningful car volume expansion in the upcoming months in order to change their stock's perception and push the stock price meaningfully higher.
We think this is because the market is unfairly discounting Nio's long-term capabilities because of what's happening with ADRs (more on this below) and because of the Chinese COVID shutdown earlier this year.
However, over the long run, we still remain very bullish on Nio's stock.
This is because even if Nio's new models don't generate positive cash flow in the short term, we think its enhanced model bandwidth across segments and attractive pricing will appeal to a much wider addressable market.
Therefore over the long run, Nio should be easily able to boost its competitive position and growth outlook into 2023 and beyond.
This operational success should also further expand their financing capabilities and bargaining power in the supply chain.
But as we've now mentioned several times throughout this post, an investment in Nio doesn't come without risks. Chief among them are:
Getting De-Listed from the NYSE: To spare you the boring details, the SEC passed regulation that forces Chinese companies listed on American exchanges to disclose more information about their financials and operations. This action alone has largely been the reason why Chinese stocks on US exchanges lost 50% of their value in 2021. This regulation is scaring investors because they believe many of these companies are at risk of de-listing their shares on American exchanges because China does not want to comply with the US's rules. If this were to happen for Nio specifically, it could spell disaster as access to capital in the US would disappear seemingly overnight. This is by far the largest risk they face. While we think this will end up not being a problem, it's still a risk you need to be very aware of.
The next risk for Nio is largely due to the current macro environment we're in. If you've missed the news we're clearly in a very high inflationary, rising interest rate environment. To spare you the boring details again, as we talk about this all the time, high-interest rates are bad for hyper-growth companies like Nio. It compresses their valuations and forces investors to put capital elsewhere. With Nio clearly in the scaling growth mode, high-interest rates in 2022 are a headwind for the global EV player.
At the end of the day, while Nio does come with risks, we believe they will end up being one of the biggest winners in the EV space.
Supply chain issues, COVID shutdowns, and ADR regulations have scared investors away, but this just created massive opportunities for upside over the coming years.
With the writing on the wall far from written, this industry is young enough to have multiple winners outside of Tesla.
While we're not suggesting they'll be anywhere as big as Tesla, with a market cap of only $37B, the upside here is insane.
If growth holds up, this means that they're currently trading at a massive discount relative to historical norms in the EV space.
We, therefore, reiterate our overweight positioning and are using this sell-off to dollar cost average down!
As with many of the stocks out there right now, this stock will likely continue sliding a bit before seeing the aforementioned upside.
Short Term Price Target: $28 (40% upside)
Long Term Price Target: $40 (100% upside)
Current Price: $20
Short Term Target Date: 12 Months
Long Term Target Date: 24 Months
Market Cap: $37B
Dividend Yield: 0%