Shares of Chinese premium electric vehicle (EV) maker NIO (NYSE:NIO) surged higher yesterday after the company reported strong third-quarter earnings which beat analysts’ average revenue and profit expectations and included healthy fourth-quarter guidance. The results also confirmed that Nio’s recent sales and margin trends are dramatically improving, and indicated that 2020 is shaping up to be a really good year for the company.
Nio soared over 50% yesterday and is climbing again today. This post-earnings rally is an extension of a sizable pre-earnings rally. From its early October 2019 low of $1.19, Nio’s stock has now risen by nearly 250%, as investors have pegged this premium EV maker a strong turnaround candidate for 2020.
That’s the good news. The better news is that this rally isn’t over just yet.
Instead, I think that sustained high growth in 2020 will propel Nio up towards at least $4.50 over the next 12 months and maybe even higher.
The company’s strong Q3 earnings confirm that Nio is in the midst of a huge turnaround and that this turnaround will continue into 2020.
The Big Nio Turnaround is Here
Nio’s strong Q3 earnings report confirmed that the company’s big turnaround is finally here. More importantly, there are strong indications that this turnaround will only gain momentum in 2020.
In Q3, the company’s delivery volumes rose 35% versus Q2. That was a big improvement compared with Q2, when its delivery volumes fell 10% versus Q1. In Q3, its revenue rose 17% quarter-over-quarter, versus a 10% QoQ drop in Q2.
Its gross margins improved from -33.4% in Q3 to -12.1% in Q2. Nio’s sales, general, and administrative expenses dropped tremendously year-over-year in Q3, thanks to lower marketing spending, while its research and development expenses were flat. Meanwhile, its operating loss margin narrowed significantly.
All of these favorable trends will persist into 2020 for a few reasons.
First, China’s economy will rebound in 2020, thanks to easing U.S.-China trade tensions. Second, the company is launching a new vehicle, the EC6. Third, the company is also revamping its flagship model, the ES8. Fourth, NIO is unveiling new battery packs, which will significantly extend the driving range of all of its models. Fifth, its cost-cutting initiatives will continue to bear fruit and raise its profit margins.
The huge NIO turnaround, which started in late 2019, will continue to be powerful in 2020.
Nio made its first premium EV in late 2018, the 7-seater ES8. At first, the car was a huge hit. Until it wasn’t.
Due to limited demand for an expensive 7-seater as well as falling auto sales in China from slowing economic activity, Nio’s sales of the ES8 fell off a cliff in early 2019. Then, in mid-2019, the company launched a new vehicle, the 5-seater ES6. It was a huge hit.
At the same time, China’s economy started to pick up steam, which breathed life back into the auto market. NIO’s overall sales trends started to improve, as did its margin trends, thanks to its cost-cutting initiatives.
Nio Can Keep Running Higher
As the huge Nio turnaround persists into 2020, the fundamentals indicate that the stock can and will continue to run higher.
China’s auto market is the biggest in the world (there are roughly 25 million passenger cars sold per year in the nation) and it’s growing. EV penetration in that market is rapidly rising (EVs had a 5% share of the auto market in 2019, versus sub-1% penetration in 2015), and will continue to rapidly rise, given strong consumer demand trends and sustained support from the government.
NIO is a new player in China’s EV market and therefore has only about a 1% share of the market. But by making high-quality, stylish, and technologically advanced cars that are second-to-none in the marketplace. the company is successfully crafting a niche for itself as the premium EV brand in China,
Because Nio’s cars are expensive, the company will never sell a large number of vehicles. But as the premium EV market comes into its own, Nio could very easily nab a respectable 2%-3% share of China’s overall EV market.
If so, Nio could be selling 150,000 to 200,000 EVs per year by 2030, at respectable price points of around $50,000 per car. Its gross margins and operating margins will likely improve towards auto industry averages of 20% and 10%, respectively.
Putting all that together, my modeling suggests NIO’s earnings per share can reach 65 cents by 2030. Based on a 16-times forward earnings multiple, which is average for the market, and a 10% annual discount rate, that equates to a 2020 price target for Nio’s shares of nearly $4.50.
The Bottom Line on Nio
Nio was once hyped as the Tesla (NASDAQ:TSLA) of China. In early 2019, it was being valued as such. The reality, though, is that Nio will never attain that level. As this reality emerged and contrasted with Nio’s valuation, the shares crashed.
But NIO will emerge as a niche but sustainable player in China’s booming EV market. This reality will emerge in 2020, and as it does, the huge rebound of Nio’s shares will continue.
As of this writing, Luke Lango was long NIO.