NIO: Long-Term Trajectory Is Upward

Nio (NIO) is a Chinese multinational automobile manufacturer often dubbed the Tesla (TSLA) of China.

The Shanghai-based electric car company has been on investors’ radars for a while now. Nio’s shares are up 58.7% over the last year alone, but don’t get too excited yet. There are still some risks to consider before you invest your hard-earned money into this innovative startup.

Investors are still on edge about this company’s prospects, which is why the stock took a dip recently. Principally, there are fears surrounding potential regulatory activity and supply chain disruptions. I am bullish on the stock.

There are other factors at play as well. Last year, EV stocks enjoyed unprecedented gains. However, they are slowly losing steam because of a broader correction, and investors pouring their capital into recovery plays.

In addition, investors are increasingly concerned that the U.S. central bank will raise interest rates sooner than expected. With rising rates, people will move their money from the equity market to bonds.

However, despite the broader economic outlook, it is important to judge each stock on its merits. Founded in November 2014, Nio has transformed itself into a very reliable name in the EV space.

In terms of top-line growth, it is handily beating Tesla. Although Tesla enjoys a healthy relationship with China, Nio has a strategic partnership with the local government of Hefei in China’s central Anhui province.

Some may criticize its close relationship with a local Chinese government. However, considering the regulatory environment in China, this is a boon rather than a curse. (See today’s best-performing stocks on TipRanks)

Keep the Long Game in Mind

Nio is under pressure because of chip shortages and regulatory headwinds. The stock is down 38.4% from its peak earlier this year of $66.99 per share. However, in recent weeks we have seen a slight trend reversal.

Goldman Sachs (GS) has indicated that Nio is due for a turnaround. The improved outlook, paired with the company’s stronger-than-expected quarterly delivery numbers, has led the stock upward.

Considering the latest developments, Goldman Sachs upgraded its rating on the stock to Buy from Hold. The analysts covering the stock assigned it a $56 price target.

As touched upon above, September deliveries reached a new monthly record. The EV maker delivered 10,628 vehicles, representing 125.7% year-over-year growth. For Q3, Nio delivered 24,439 vehicles, a 100.2% jump year-over-year.

Considering Nio’s exemplary performance, this growth is not very surprising. Still, given how many automakers are struggling right now with anything new coming out, it’s impressive nonetheless.

It’s also worth noting that NIO House studio in Norway opened its doors and launched the ES8 – a fully electric SUV with 220 miles of range, on September 30. The first vehicle deliveries within this region are included in the September delivery results.

By moving its first European plant to Norway, Nio is taking a proactive stance in expanding beyond its native shores. Importantly, it gives the company access to an entire continent that is the most aggressive in terms of EV adoption.

The stunning results came as a surprise amid tightening global automotive chip supply. It is especially impressive since Nio had revised its initial Q3 delivery guidance down to 22,500 to 23,500 units, from 23,000 to 25,000 vehicles.

China’s Regulatory Crackdown Won’t Hurt NIO

Nio’s recent success has come at a cost, as its business model relies heavily on government assistance. For its operational needs, Nio finalized a $1-billion loan with local authorities in the city of Hefei, Anhui province.

The deal was signed at the height of the pandemic last year, as the U.S.-listed EV company struggled due to shutdowns. The amount may not seem like much, considering how valuable these companies have become. However, in an investing world wary of excessive Chinese government involvement, it may irk many.

According to the agreement between the parties involved, state-owned companies have invested approximately $1 billion in a new unit, “Nio China.” Nio has committed to invest $600 million in the enterprise, and constructed a joint-venture factory in Hefei.

For many investors, all of this is cause for concern, not celebration. The Chinese government is mulling tightening regulations for domestic companies listed in America. Due to the trade war, Hong Kong will benefit immensely, attracting many outstanding U.S.-listed Chinese firms. Nio has already filed for a second listing in Hong Kong.

Nevertheless, things need to be put into perspective. Having an excellent relationship with the Chinese will help and not hinder Nio’s prospects. It should relax investor concerns about potential regulatory activity, and is a valuable source of support during rough periods.

Plus, Nio is not leaving the U.S. exchanges anytime soon. The U.S.-China trade war is fierce, but Washington does not want high-quality Chinese firms to exit American markets.

Upcoming Catalysts

All eyes are now on the impending third-quarter results, and the potential for a new vehicle announcement. In addition, the Nio ET7 is set to hit the German market in 2022. The automaker confirmed that deliveries should begin by this year’s fourth quarter, with more information coming soon. 

Bulls will also look forward to NIO Day. It is an annual event for the company’s newest products and technology updates. It will take place on December 18 in Suzhou, a city in the west of Shanghai.

The latest event will mark the fifth NIO Day. At the last event, held on January 9, the company unveiled its first-ever sedan, ET7, and an exciting battery pack. At the forthcoming event, a new sedan, ET5, and a sportscar, named EF9, are rumored to make their debuts.

Investors will gobble up any positive information regarding new car launches and product suites emanating from the event. Inevitably, it will lead to an uptick in the stock price.

Wall Street’s Take

Looking at the consensus breakdown, it becomes clear that Wall Street loves Nio stock. It has a Strong Buy consensus rating, based on eight recent Buy reviews, which is great news for bulls.

The average Nio price target is $60.26, implying an upside of 46%. Analyst price targets range from a high of $72 per share, to a low of $45 per share.

Bottom Line

When it comes to EVs, Nio is at the top of its game. It is smashing monthly and quarterly records, and possesses strong fundamentals.

Plus, consumers all over the world want more green transportation options. As well, governments are helping facilitate the shift to EVs by enacting favorable policies.

That does not mean bears do not have valid arguments. Interest rates, semiconductor shortages, and uneasy relations between the U.S. and China will undoubtedly affect Nio. However, these are temporary headwinds. In the long run, Nio is an excellent EV stock.

Disclosure: At the time of publication, Faizan Farooque did not have a position in any of the securities mentioned in this article.

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