After reporting strong deliveries, NIO (NASDAQ:NIO) stock traded to as high of $4 only to give up half of the gains.
Though the valuations are unfavorable when considering competition and recalls, investors should not dismiss macro tailwinds and strong unit deliveries in June.
Despite the stock dipping 10% in the last week, selling volume is also falling. This suggests that the profit-taking phase of Nio stock is coming to an end.
Nio’s Strong June Deliveries
Nio delivered 927 ES8s and 413 ES6s in June. The company’s total second-quarter deliveries topped 3,553. This is above the prior guidance range of 2,800 to 3,200. Despite the impressive beat, Nio stock could not get away from the short-term selling pressure.
With a short float of 20%, bears need the stock to keep falling. When July’s rally took the stock back to $4.00, continued buying momentum would have squeezed the shorts. This would have forced them to cover the bet against Nio stock.
The bad news for investors holding Nio at higher prices is that the company needs another strong month of deliveries. One month of strong performance does not form a trend.
Bears may have caught a short-term break when Nio recalled ES8s produced between April 2, 2018 and Oct. 19, 2018. The 4,803 affected vehicles will need is battery packs replaced. Nio said it would compensate those who faced damage related to the flaw.
Fortunately, there were just a handful of recalls over the last few months in China. Nio should face limited costs due to damages. And while the recall will add to its costs, the effort will pay off as it wins customer trust.
Strong ES6 Delivery Momentum
Nio only started officially beginning delivery of the five-seater long-range NIO ES6 SUV last month. Customers in Beijing, Shanghai, and Guangzhou received the ES6 first. Achieving 413 deliveries in June alone signals strong momentum ahead.
Yet Nio’s ambitions do not stop in China. It is cautiously eyeing Europe’s EV market. Already, Nio had 200 people in Munich, Germany. In the short-term, Nio will limit how many resources it puts into growing abroad. Until the company’s revenue exceeds operating costs in its home market of China, Nio will only keep an eye the German and European markets for now.
Waiting for the right time to expand will weaken the bearish argument that Nio will never operate profitably. But all that matters to stay afloat is liquidity. Nio may sell debt or issue shares should it need more cash for operations. Its R&D spend paid off, so investors need not worry about higher costs here. Nio’s ES6 SUV competes with Audi Q5, Mercedes-Benz GLC, and BMW X3.
The ES6 offers better performance, service, and lower maintenance and operating costs. In China, owners enjoy a lower total cost of ownership. Charging the EV costs less than filling it up with gasoline. And in some cities where gas-powered cars owners must leave the car home once a week, Nio owners do not face the same restrictions.
No Share Issuance Expected
With NIO stock well-below its IPO price of $6.26, the company will not sell shares to raise cash. Instead, it will reduce the size of its operations to cut costs. Closing inefficient retail space and cutting sales staff will also lower operating costs. Higher revenue, spurred by the Chinese government extending the 10% tax break for EVs, will cut Nio’s quarterly losses.
In its next quarterly earnings report coming up in August, Nio may report a smaller loss. Management may even forecast when it expects a profit. If it does so, expect Nio stock to rally back to at least $4.
One risk investors should consider is Tesla’s (NASDAQ:TSLA) price cut on all vehicles shipped to China. Price cuts to the Model 3, S, and X might lead to higher competition for Nio. A more realistic scenario, though, is that Chinese buyers may decide to remain nationalistic by buying a Nio vehicle instead.
Your Takeaway on NIO Stock
Investors will have trouble assigning a fair value on Nio stock until the company makes a profit. One may guess that Nio will grow revenue by up to 25% annually for the next five years. In this scenario, the five-year DCF growth exit model suggests the stock is worth $5.50, over 60% above its recent $3.30 closing price.
As of this writing, the author did not hold a position in any of the aforementioned securities.