Nio Looks Attractive after Meaningful Correction

The EV industry is on a high-growth trajectory. Estimates suggest that electric car sales are likely to increase at a CAGR of 29% through 2030.

Even with intensifying competition, there are companies positioned to survive and grow. Nio (NIO) is one EV company that’s likely to be among the market leaders.

It’s worth noting that Nio stock has been depressed in 2021. The stock has declined by nearly 36.9% year-to-date.

After a deep correction, I am bullish on the Chinese EV maker. (See Analysts’ Top Stocks on TipRanks)

An important point to mention is the company’s balance sheet. As of Q3 2021, Nio reported cash and equivalents of $7.3 billion. Further, the company raised $2 billion from an at-the-market offering in November 2021.

With a total liquidity buffer in excess of $9 billion, the company is well positioned to pursue aggressive growth. One reason for the stock correction has been equity dilution. However, considering the current cash buffer, Nio seems fully financed for the next 12-18 months.

Vehicle Deliveries Growth Through 2022

Nio has been reporting stellar growth in vehicle deliveries. For Q3 2021, the company reported 100.2% year-over-year growth in deliveries to 24,439 vehicles. Even for November 2021, deliveries increased by 105.6%.

While the stock has been depressed, fundamental developments remain strong. It’s also likely that 2022 will be another good year in terms of deliveries.

One reason to be bullish for 2022 is the company’s plan to launch three new models. These models will be on Nio’s Technology Platform 2.0. Introduction of new models will ensure delivery growth in 2022 and 2023.

Another growth catalyst for Nio is international expansion. It’s likely that Nio will expand into five new European countries in 2022. Nio already has presence in Norway.

On the flip-side, the company is likely to see higher losses at the operating level as marketing expenses increase. However, the focus is likely to be on increasing the addressable market.

Tesla (TSLA) has already demonstrated the point that EV companies can deliver healthy free cash flows with operating leverage. For Q3 2021, Tesla reported free cash flows of $1.3 billion.

With several new models in the pipeline and international expansion, Nio seems to be at an inflection point.

To elaborate further, Nio reported vehicle margin of 14.5% in Q3 2020. For the most recent quarter, vehicle margin expanded to 18%. Similarly, the gross margin has improved significantly on a year-on-year basis.

After-sales service is another factor that’s likely to be a growth catalyst.

Nio plans to have over 4,000 NIO battery swap stations worldwide by 2025. Of this, at least 1,000 battery swap stations will be outside China. Additionally, Nio is also ramping up its charging infrastructure. These initiatives should help sustain delivery growth.

Wall Street’s Take

Turning to Wall Street, Nio has a Strong Buy consensus rating, based on eight Buys and one Hold assigned in the past three months. The average Nio price target of $60.67 implies 79.5% upside potential.

Concluding Views

A big challenge for Nio is intensifying competition. Innovation one factor that’s likely to give the company an edge.

For Q3 2021, Nio reported research and development expenses of $185.2 million. On a year-over-year basis, R&D expenses increased by 101.9%. Clearly, Nio has been investing in new products and technologies.

Even with the challenge related to chip shortages, Nio has continued to deliver strong numbers. The positive momentum is likely to continue in 2022 with new model launches.

Considering the factors discussed, it seems very likely that Nio stock is poised for a reversal.

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