One of the more interesting battleground stocks in the market is Chinese electric vehicle (EV) maker NIO Inc. (NYSE:NIO). Often considered the Chinese version of Tesla (NASDAQ:TSLA), NIO stock has been one of the hottest buys in the entire market in early 2019.
From January to early March, NIO stock rallied from $6 to $10, boosted by burgeoning global EV demand, China economic improvements, and a 60 Minutes segment which highlighted NIO’s potential in the China electric car market.
That rally didn’t last. NIO reported ugly fourth quarter numbers in mid-March. Management also delivered a below-consensus guide, and said that early 2019 sales volume was actually dropping from late 2018 levels. Investors freaked out. Over the course of the next two weeks, NIO stock lost half of its value. Today, the stock trades right around $5.
In other words, NIO Inc. stock has ricocheted from $6 to $10 to $5, all over the course of three months. That is the textbook definition of volatility.
But, volatility works in both directions: Sharp rallies often end in sharp declines, and sharp declines often end in sharp rallies. Given this volatility truism, and that NIO’s fundamentals and technicals support a rally here, it increasingly looks like now may be the time to turn bullish on beaten-up NIO stock.
History and Technicals Imply a Rally Ahead
NIO stock has been highly volatile ever since hitting public markets in late 2018. But, this volatility has followed a fairly straightforward pattern. If this pattern persists, then the next move in NIO stock could be a sharp rally higher.
The pattern here is simple. NIO stock tends to drop sharply over the course of a few weeks to a month, and then reverses course and stages a big rally over the course of the next several weeks. From early September to early October, NIO stock dropped from $12 to $6, only to rebound to $8 by mid-October. Then, from mid-October to early November, the shares fell back to $6, only to bounce back to $8 by late November. That was followed by a sell-off to $6 into Christmas, which turned into a multi-month rally to $10+ prices.
Now, we are just over three weeks into this new big sell-off. If history repeats itself, that means we are close to a turnaround, and that NIO stock could be due a for a big bounce back soon.
Further, the technicals look good here for a rebound. Each of the past major sell-offs in NIO stock found solid footing around the $6 level. This most-recent selloff broke that support level. But, the stock appears to be finding new footing at $5, and that means that a successful test and hold of the $5 level over the next few days could result in a bounce back rally over the subsequent few weeks.
Fundamentals Support Higher Prices
Maybe even more important than technicals and history, the fundamentals support the notion that NIO stock is undervalued here.
NIO’s current market cap is just above $5 billion. While that is big for a company that delivered barely more than 10,000 vehicles last year, it isn’t all that big for a manufacturer that could one day be a very relevant player in the soon-to-be-huge China EV market.
Going by the numbers, China’s passenger car sales run around 25 million new vehicles each year. That represents about one-third of global passenger car sales. EV unit sales in China are rapidly growing, and have gone from sub-1% share a few years ago, to north of 4% share last year. Extrapolating this out and assuming continued urbanization, then China’s total car sales could measure in excess of 30 million vehicles by 2030. Given consumer demand and legislation trends, it also isn’t unlikely that roughly 25% of those new car sales will be electric, so around 8 million new EV sales in 2030.
NIO won’t control a big part of that market. The company is a luxury player in the EV space, and its high price points will restrict mass market adoption. Still, 3-5% market share seems doable. At the midpoint, that implies roughly 320,000 deliveries by 2030, up from just over 10,000 last year. At an average price of $50,000, that equates to a revenue opportunity of $16 billion by 2030. Assuming auto-average 20% gross margins and a 10% opex rate, that should flow into around $1.2 billion in net profits by 2030.
Based on a market average 16x forward multiple, that implies a fiscal 2029 market cap for NIO stock of nearly $20 billion. Discounted back by 10% per year, that equates to a fiscal 2019 market cap of just under $7.5 billion.
So, with that $5 billion market cap today, NIO stock can be considered fundamentally undervalued.
Bottom Line on NIO Stock
NIO stock has gone from big winner to big loser, and it may be on track to reverse course back into the W column soon. History, technicals, and fundamentals all support the recovery thesis, and as such, I think there’s a good chance we see NIO stock rally big from a $5 base over the next few weeks.
As of this writing, Luke Lango was long NIO and TSLA.
