Renewed enthusiasm for electric vehicle supplier Nio (NASDAQ:NIO) sent the stock up three-fold from 52-week lows. And Nio stock is continuing this enthusiasm today, climbing more than 6% in early morning trading. There are several key reasons behind Nio’s recent success and speculators are betting that two major positive catalysts will propel the stock higher in 2020.
First, some believe that Nio’s losses may shrink after the 35% climb in electric vehicle delivery volumes it reported for Q3. Second, a cash infusion from China, via a state-owned company, will put an end to worries over bankruptcy risks.
Investors have no doubt that Nio has an attractive suite of EV products. So, if bankruptcy risks are off the table, how much more upside does Nio stock have in 2020?
Nio’s Fundamental Strength
Nio reported growth in its backlog in the third quarter that continues in the current fourth quarter. ES6 is a competitive product thanks to pricing and quality. Brand awareness among its user community may lead to accelerated growth ahead. And after cutting its Nio spaces presence to lower costs, growing the sales network in fewer locations will improve margins.
On its conference call, Nio highlighted that its user community is in 296 cities across China. Nearly half, or 45%, of new orders, were due to referrals from existing users. The company minimized costs by having over 1,300 user volunteers at Nio House, Space and at related auto shows. And in 2019, Nio said it opened 48 Spaces and 22 Houses in 52 cities. The company needs a growing physical presence to let potential customers explore Nio’s ES6 and ES8 EVs.
On NIO day, the company announced a 100 Kilowatt battery pack and a 20 kilowatt DC Power Home. By comparison, Tesla (NASDAQ:TSLA) typically offers an 85kWh on the Model S and 54kWh, 62 or 75kWh for its Model 3. With a larger battery, Nio may boast improving range.
The company also announced the EC6, which adds the third product to its line-up. This model is a Coupe SUV, much like a Ford (NYSE:F) Mustang Mach-E. But the EC6 is fast and has a great range, accelerating from 0 – 100 km/h in 4.7 seconds and it has a range of up to 615 kilometers (382 miles). Ford’s Mach-E has a standard range of 230 miles and 300 miles for the extended range model with rear-wheel drive.
Nio’s all-new ES8 has 188 improvements and is equally as fast as the EC6. The ES8 is a more competitive product with 580 kilometers.
On November 4, 2019, Nio and Intel’s (NASDAQ:INTC) Mobileye unit announced strategic cooperation to develop level 4 autonomous driving EVs.
Nio Is Cutting Costs
To slow its cash burn rate, Nio cut costs and reduced its headcount to 7,500 employees. SG&A costs fell by 18.1% sequentially. R&D spending fell by 21.3%. In the third quarter, Nio posted revenue growth of 21.8% from Q2/2019. But the cost of sales of RMB2.1 billion exceeded revenue of RMB1.8 billion. Gross margin was a negative 12.1%, an improvement from the previous quarter’s 33.4%.
In Q3, Nio lost RMB2.4 billion and its net loss per share was RMB2.48, or 35 cents. The company ended the quarter with RMB2 billion as of September 30, 2019.
A Promising Opportunity in Nio Stock?
Nio cut its staff from 9,900 people to 7,500. This is a start, but it does not put an end to the liquidity problem ahead. So, if Nio’s confirmation that it is in talks for $1 billion in financing and strategic opportunities bears fruit, the stock may continue its rise from here.
Only three analysts cover Nio stock and have an average price target of $6.88, 47% above its recent $4.67 closing price. In a 10-year DCF revenue exit model, where sales grow in the 5% range annually, Nio stock is worth $5.49.
SimplyWall is even more optimistic. Based on its future cash flow, the site calculates the stock is worth over $10 a share.
The Bottom Line on Nio
Nio’s nearly three-fold return rewarded investors who bought the stock at the absolute bottom. Nio stock may dip on a “sell the news event,” after the company establishes $1 billion in loans. But for the rest of 2020, the stock may climb higher as the wall of worry ends. By 2021, Nio will need to start reporting a break-even quarter. Otherwise, the stock will take longer before reaching the $10 fair value.
As of this writing, Chris Lau held shares in Ford.