Why a Bump in Vehicle Sales Could Accelerate Nio Stock

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Many China-based stocks traded higher ahead of the U.S./China trade deal. Even NIO (NYSE:NIO), whose quarterly sales have been inconsistent from one period to the next, enjoyed a pop in Nio stock.

Why a Bump in Vehicle Sales Could Accelerate Nio Stock

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And even though the company is around 30 times smaller than Tesla (NASDAQ:TSLA) by market capitalization, Nio stock is cheaper for a reason. Tesla is the more likely electric vehicle (EV) supplier whose global market share growth will grow. Nio’s prospects are still limited to the Chinese region.

Not a single analyst calls Nio stock a ‘buy,’ either. All six analysts rank the stock a ‘hold’ and have a $2.08 average price target (per Tipranks). Nio needs multiple tailwinds pushing its prospects higher before investors should consider buying Nio stock.

Trade Deal

The U.S. decision to defer tariffs against China will, at least for now, limit any further damage to the Chinese economy. This at least removes more fears on a slowdown in the region. In doing so, it may raise consumer confidence and encourage the purchase of expensive items like a Nio EV.

At a macro level, China said that it wants one-quarter of new cars sold by 2025 to be electrified. This ensures a brighter future for Nio, whose prospects depend on the demand for electric cars. But in the near term, China needs to contend with falling auto sales. China said that auto sales fell for a 17th consecutive month in November.

The China Association of Automobile Manufacturers said that total car sales fell 3.6% from last year’s levels. In October, sales fell 4% while in September, it dropped 5.2% Y/Y. These figures suggest that Nio’s EV unit sales will struggle.

New Nio Model

Nio’s ES6 and ES8 are more expensive than gas-powered cars, so the product is sensitive to consumer confidence levels. Still, Nio will launch its 3rd EV model on Dec. 28. The sports utility vehicle (SUV) may offset Nio’s weak November sales. Details of the SUV coupe are unknown so far but will have a panoramic view window. It will compete with the Mercedes-Benz GLC Coupe and Tesla’s Model Y.

Nio needs to find success with the SUV coupe release. Its November delivery date was unchanged from October. So, even though the ES6 is a five-seater SUV that is lower-priced than the ES8, unit sales are not growing. Nio did beat outperform its competition, namely WM Motor and Xpeng Motors. It delivered 2,528 EVs in November, compared to 2,526 units in October.

The ES6 unit deliveries drop of 7% sequentially is disconcerting. If Nio is unable to increase sales of the less expensive model, investors will be less likely to pay 2.2 times sales for NIO stock. By comparison, Tesla’s stock trades at 2.6 times sales.

Sales Acceleration Achievable

Nio has hope. By the end of this year, it will have around 200 NIO Spaces in more than 100 cities across China. The expanded sales exposure should help build awareness for the product and help reverse declining sales.

Nio will also push for more regional promotions to strengthen sales. In September, it offered extra incentives for the ES6 and ES8 models for buyers in Beijing. It also supported more than eight auto financing programs, supported by seven banks, to improve affordability for its customers.

Your Takeaway on Nio Stock

According to simplywall.st, Nio stock is forecast to be unprofitable for the next three years. Speculators may dismiss its losses as the company seeks to grow sales, first.

But if losses do not fall soon, investors will lose patience. So, this implies that the stock is only suitable for traders in the near-term. Investors demanding greater stability should look elsewhere for now.

Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


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