There are A few fundamental factors that have depressed the stock. First and foremost, Chinese stocks have declined on regulatory headwinds. Further, chip shortages have resulted in Chinese vehicle sales have declining for the fourth straight month. (See Nio stock charts on TipRanks)
A potential delay in the company’s Hong Kong stock listing is yet another reason for weakness in Nio stock. However, these headwinds are temporary in nature, and provide a good opportunity.
I am bullish on Nio stock, as multi-year industry tailwinds could support robust growth.
Bullish Long-Term Outlook
The EV industry is at a growth inflection point, and China seems to be leading the way. BYD founder Wang Chuanfu believes that new energy vehicles will account for 70% of China’s new car sales by 2030.
China has also imposed a mandate on automakers that requires EVs to make up 40% of all sales by 2030.
On a global scale, Deloitte expects the EV market to grow at a CAGR of 29% over the next decade.
Strong Balance Sheet for Growth
As of June 30, 2021, Nio reported cash and equivalents of $7.5 billion. A robust liquidity position will allow the company to pursue aggressive growth.
In terms of a stock catalyst, Nio has expansion plans beyond China. The company is likely to enter Europe later this year. At the same time, Nio has plans to expand its presence in most important global markets by 2023-24. International expansion is likely to ensure that the company’s vehicle delivery growth remains strong.
Another positive catalyst for Nio is the launch of new vehicles. The company has plans to reveal new products based on the NIO Technology Platform 2.0 in 2022. This includes a premium smart electric sedan.
Nio has ample financial headroom to invest in innovation, and new product development. Additionally, the planned listing in Hong Kong will further boost the cash buffer.
Gradual Improvement in Margins
Nio has continued to report strong vehicle deliveries, even with chip shortages. For Q2 2021, the company reported delivery of 21,896 vehicles. On a year-over-year basis, deliveries were higher by 112%.
With growth in deliveries, Nio has also seen a gradual improvement in vehicle level margins. Vehicle margins for the last quarter were 20.3%, and expanded by 1,060 basis points on a year-over-year basis.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, NIO stock comes in as a Strong Buy, with six Buys assigned in the past three months.
The average NIO price target is $67.52 per share, implying 92.2% upside potential from current levels.
For Q2 2021, Nio reported research and development expenses of $136.9 million. On a year-over-year basis, expenses were higher by 62.1%.
Nio has been focused on new product development and innovative technologies. These investments are likely to ensure that Nio remains ahead of the curve in a highly competitive market.
It also seems that the chip shortages have discounted the stock price. Once temporary headwinds wane, Nio stock is due for a rally.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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