The electric vehicle (EV) industry has faced multiple headwinds in the last 12 months. Be it chip shortage or broader supply-chain issues, industry growth has been impacted. Raw material inflation also threatens to impact sales as electric vehicle companies increase their selling prices.
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However, beyond these temporary headwinds, the EV industry is poised for growth over the next decade. The correction in EV stocks, therefore, provides a potentially-attractive entry opportunity.
Nio (NIO) stock is one name from the Chinese EV industry that looks attractive. In the recent market meltdown, NIO stock corrected to lows of $11.67. In less than two months, the stock has surged 88% to current levels of $22.1.
I am bullish on NIO stock, and I believe the rally will likely sustain. Let’s discuss the industry and company-specific catalysts that will support growth.
Tax Cuts and Subsidies
In terms of favorable policies, there are two factors to note. China’s exemption of the 10% EV-purchase tax will conclude at the end of this year. The policymakers are, however, considering an extension of the exemptions. Also, China is considering an extension of EV subsidies into 2023.
It’s very likely that the tax cuts and EV subsidies will be extended. With weak growth in China, favorable policies are needed to boost consumption. Nio is positioned to benefit from these potential extensions.
Nio’s Smart Score Rating
Worth noting, on TipRanks, NIO receives a Smart Score rating of 8 out of 10, indicating a solid chance for the stock to outperform the broader market.
New Models to Boost Delivery Growth
For the second quarter of 2022, Nio reported 14.4% delivery growth on a year-over-year basis to 25,059 vehicles. Deliveries growth was impacted due to the renewed surge in COVID-19 cases. However, Nio is positioned for continued acceleration in deliveries once temporary headwinds wane.
A key reason to be bullish is the continued launch of new models. Nio commenced delivery of ET7, a premium smart electric sedan, in March 2022. Further, ES7, a mid-large five-seater smart electric SUV, is expected to commence delivery in August 2022. The ET5 model’s delivery is also expected to begin in September 2022.
Clearly, there is an attractive lineup of new vehicles, and this will boost delivery growth in 2023 and potentially in 2024.
Another point to note is that Nio has aggressive international expansion plans. The company already has a presence in Norway. For the current year, Nio plans on expanding in Germany, the Netherlands, Sweden, and Denmark. Nio is also targeting a presence in 25 countries by 2025.
Therefore, delivery growth over the next few years will be supported by international expansion. Nio reported cash and short-term investments of $7.8 billion as of March 2022. Therefore, the company has substantial financial flexibility for aggressive growth.
Nio is already ramping up its manufacturing capabilities. Last year, Nio announced that it would work on doubling the capacity in its China assembly plant to 240,000 vehicles annually. There is also speculation that Nio is planning a manufacturing facility in the United States. This will help the company avoid a 25% import duty on cars.
With ambitious growth plans, Nio stock looks attractive after a correction of 56% in the last 12 months.
Vehicle Margins Can Improve
Profitability in this business should improve over time. For context, in the first quarter of 2022, Tesla (TSLA) reported $4 billion in operating cash flows. As electric vehicle companies scale up in terms of deliveries, there is the potential to generate robust cash flows.
For Q1 2022, Nio reported a vehicle margin of 18.1% compared to 21.2% in Q1 2021. The margin was impacted in the near term due to higher investments and inflationary factors.
However, in the next few years, the vehicle margin is likely to expand as delivery growth sustains. Also, if Nio plans factories in multiple locations (similar to Tesla), logistics costs should decline. Overall, Nio is positioned for strong cash flows in the next few years.
On the flip side, Nio is expanding aggressively into multiple countries. This will translate into higher marketing expenses. Cash burn is likely to sustain in the coming quarters.
Having said that, the markets are likely to focus on delivery growth. With operating leverage, its EBITDA margin should also improve.
Wall Street’s Take on NIO Stock
Turning to Wall Street, Nio has a Strong Buy consensus rating based on 10 Buy ratings assigned in the past three months. The average NIO stock price forecast of $33.66 implies 52.1% upside potential.
Concluding Views – An Attractive EV Stock
The global adoption of EVs is still at an early stage. However, as Europe looks to reduce dependence on Russia for energy, EV adoption is likely to accelerate.
Nio will be positioned to benefit as it aggressively expands in Europe. Nio also has robust financial flexibility, and further equity dilution seems unlikely, even with aggressive growth plans.
In terms of risks, a global recession can impact growth in 2023. However, it seems that this factor is largely discounted in the stock. Intensifying competition is also a potential risk.
It’s worth noting that Nio reported a research and development expense of $277.9 million for Q1 2022. On a year-over-year basis, R&D expenses increased 156.6%. With a focus on innovation, Nio can gain market share even as competition intensifies.
Overall, Nio stock looks attractive among EV stocks. Even after the recent rally, the stock is worth considering from a long-term perspective.
