The stock market is going up, but not every stock is on that bandwagon; some are feeling downward price pressure. Sometimes, the reasons are systemic, sometimes idiosyncratic, and it’s not uncommon to find otherwise sound stocks down in the low-price doldrums.
Of course, if those stocks are otherwise sound, this dynamic presents investors with the perfect opportunity to ‘buy low and sell high,’ the ancient and tried-and-true method of building success. The only trick is recognizing just which stocks are ready to bounce back, and which are down for the count, for good reasons.
Recognizing the difference is the key to putting together a profitable portfolio, and fortunately, we can turn to Wall Street’s professional stock analysts to help us on that road. Not all beaten-down stocks are going to find the road back to greatness, but the analysts have built their careers on finding the ones that are – and we can follow their recommendations in our own investment activities.
Enter Morgan Stanley, whose analysts have recently turned their focus to two struggling stocks: Chinese EV maker Nio (NYSE:NIO) and US green hydrogen firm Plug Power (NASDAQ:PLUG). The analysts are predicting wildly different forward paths for these stocks, so let’s give them a closer look and find out just which one Morgan Stanley has selected as the better stock to rise from the ashes.
Nio, Inc.
The first Morgan Stanley stock call we’ll look at is Nio, one of China’s leading electric vehicle companies. Nio launched in 2014, spent its early years working on vehicle design and development, and introduced its first EV production models onto the market in 2019. The company’s lineup currently includes eight pure-play battery-powered electric vehicles, including the company’s flagship SUV model, the ES8. Other models include the EC7 coupe and the ET7 sedan. Five of the current models are SUVs, both multi-purpose and suburban, and the company is on track to commence deliveries of a new sedan model, the ET9, in the first quarter of next year.
Nio has focused on building cars with stylish designs and the latest in battery technology, using these as selling points to promote the vehicles to China’s growing middle and upper-middle class consumer base. However, some of Nio’s best-selling points are not even found in the cars. The company has pioneered a Battery-as-a-Service support model, allowing customers to buy subscriptions to a battery changing service as an alternative to plug-in charging. Nio has built a network of battery swapping stations, approximately 2,300 across China, where spent batteries can be quickly replaced with fully charged power packs. The BaaS model is popular with customers, and Nio plans to expand its swapping network by as many as 1,000 stations this year.
Nio has also taken a leading role in developing vehicle automation systems, including both driver assistance and automated driving technologies. The company is testing these systems under real-world road conditions, and making plans to introduce them as subscription offerings for its customers. Nio has prioritized automotive high-tech as a long-term selling point to attract customers to its vehicles and services.
In the first quarter of this year, Nio’s approach brought the company US$1.37 billion in quarterly revenues. However, this was down more than 7% year-over-year, and missed the forecast by US$70 million. At the same time, the company ran a net earnings loss in the quarter of 33 cents per share by non-GAAP measures. While negative, the EPS was 6 cents better than had been anticipated.
At the beginning of this month, Nio reported its vehicle delivery figures for the month of May. The headline was 20,544 vehicles delivered for the month, for a 233.8% year-over-year increase. The company’s year-to-date deliveries were reported as 66,217, for a 51% y/y gain, and the cumulative total, since the company began regular customer deliveries, stood at 515,811 on May 31.
Meanwhile, NIO shareholders have endured a challenging year, witnessing a 51% drop in the company’s stock price. Despite this downturn, Morgan Stanley analyst Tim Hsiao sees this as a potential opportunity for new investors to enter NIO at a lower price.
“Post-results stock correction might be less relevant to 1Q print/ guidance but the lack of near-term catalyst and market’s looming pessimism on challenging sector backdrop… We think the sell-off is overdone and look for the NIO’s shares to regain the lost ground… while more meaningful stock re-rating would hinge on sales momentum into 3Q and, to a greater extent, ONVO’s order conversion… Longer term, the company anticipate a 15% steady-state gross margin for ONVO and expects it to turnaround when overall sales reach 20-30k units per month,” Hsiao noted.
Along with these comments, Hsiao puts an Overweight (i.e. Buy) rating on Nio shares, and a Street-high price target of $10, which suggests ~126% upside for the coming year. (To watch Hsiao’s track record, click here)
Overall, based on a mix of 5 Buys, 6 Holds and 1 Sell, NIO stock claims a Moderate Buy consensus rating. Going by the $6.19 average price target, a year from now, shares will be changing hands for ~40% premium. (See Nio stock forecast)
Plug Power
Next up is Plug Power, an interesting company in the renewable energy sector. Plug designs, manufactures, and installs hydrogen fuel cell power systems. These fuel cells have been promoted as potential contributors to the ‘green’ economy; they use chemical reactions and energy conversion technology to provide power as a replacement for traditional batteries. Specifically, hydrogen fuel cells use a catalyst to combine molecular hydrogen and ordinary air, releasing electric energy as a result and producing only pure water as a by-product of the reaction. This technology brings the promise of clean energy, on demand and on location, without the worry of toxic chemical disposal when a battery runs out.
To further improve its environmental footprint, Plug uses ‘green’ hydrogen in its fuel cells – that is, hydrogen produced using renewable or clean energy sources. Plug is a one-stop shop for fuel cells, bringing all aspects of the technology, from initial design to final installation, under one roof. The company will also build out and install necessary fuel cell infrastructure at the customer location to ensure a smooth transition to fuel cell operations. Plug is currently the world’s largest buyer of liquid hydrogen and, to date, has installed over 69,000 fuel cell systems and more than 250 hydrogen fueling stations.
In recent weeks, Plug has announced several moves that promise to increase the footprint of hydrogen fuel cell technology. The company is working with several partners – including Airbus and Delta Airlines – to study the feasibility of developing a hydrogen fuel hub at Hartsfield-Jackson Atlanta International Airport, one of the world’s busiest by passenger traffic. In addition, the company has signed a BEDP (basic engineering and design package) contract with Australia’s Allied Green Ammonia to create a 3 gigawatt electrolyzer plant that will provide hydrogen for a new ammonia project in the Northern Territory. And finally, Plug announced on May 14 a conditional loan guarantee from the US Department of Energy, up to $1.66 billion, for development, construction, and ownership of up to six new green hydrogen production facilities.
Despite Plug’s ambitious initiatives and strategic partnerships, its stock has fallen 73% in the course of the last 12 months.
Investors want to see results, and Plug’s last earnings report shows that the company isn’t there yet. The 1Q24 report showed revenue of $120.3 million, a figure that missed the forecast by over $37 million and was down almost 43% year-over-year. The company’s EPS came to a net loss of 46 cents per share, 13 cents per share below expectations.
In light of these developments, Morgan Stanley analyst Andrew Percoco remains cautious, refraining from recommending investment in Plug Power at this time.
“We maintain a more cautious view on PLUG’s path to profitability based on current unit-economics of green hydrogen, which could continue to put pressure on liquidity and require more equity than is appreciated by the market. To that end, we continue to expect PLUG will need to issue $350m of equity from 2Q24-4Q24 to fund the cash flow drag from operations… We believe there is heightened risk of a delayed path-to-profitability for PLUG’s business, especially within its equipment segment,” Percoco explained.
To this end, Percoco rates PLUG shares as Underweight (i.e. Sell), and his $2.50 price target implies a one-year downside of 8%. (To watch Percoco’s track record, click here)
That’s the bear case. The Street generally is recommending a Hold (i.e. Neutral) here, based on 20 ratings that include 6 Buys, 10 Holds, and 4 Sells. Plug stock has a selling price of $2.72 right now, and the average target price of $4.70 suggests it will gain ~73% in the next 12 months. (See PLUG stock forecast)
Not all beaten-down stocks are created equal – and with the data and the analyst views all in, it’s clear that Morgan Stanley has chosen Nio as the better buying proposition at these low levels.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
