When regulators halted trading on China-based firm Luckin Coffee (NASDAQ:LK), investors sent Nio (NYSE:NIO) stock lower. Yet the fraud by Luckin is a company-specific problem. Nio is in far better shape.
The company posted March delivery numbers that showed a rebound of demand for its vehicles in China. The improving fundamentals suggest that Nio stock may start building on its uptrend that started in early April.
March 2020 Delivery Update
Nio posted a 117% month-over-month increase in vehicle deliveries in March. The company’s production capacity rebounded, helping its deliveries top 1,533 vehicles in March. That consisted of 1,479 5-seater ES6 SUVs and 54 of the 7-seater ES8s SUVs.
In April, Nio will start delivering an all-new ES8 that has over 180 improvements. Nio’s CEO, chairman and founder William Bin Li said that “in parallel with our continued online sales efforts, our in-store visits have also witnessed a gradual pickup. With the continuous support from our loyal user community, we have seen increasing order backlog since February.”
China is still slowly re-opening businesses and returning to normal life after the shutdown caused by the Covid-19 outbreak. As consumers become more upbeat and they become comfortable with buying either online or in offline sales channels, expect Nio’s growth to accelerate.
China has the largest electric vehicle market in the world and is looking to support Nio. But the company has plenty of work ahead of it.
On April 7, Nio reported that it had delivered a combined 3,838 ES6 and ES8 vehicles in Q1, about 10% above the midpoint of its prior guidance.
But Nio has said it expected many challenges to confront China and the global economy, which will have an impact on the auto industry in the country. Nio, however, believes it will stand out from the competition.
Tesla’s (NASDAQ:TSLA) 11,280 vehicle sales easily outpaced Nio’s ES6 sales. So, to catch up, Nio will need to offer features that are on par with that of Tesla. Nio announced two driver assistance features for the ES6 and ES8 models. Navigation On Pilot will “allow the vehicle to drive on and off ramp, overtake, merge lanes and cruise according to planned routes.”
Self Automatic Parking Assist with Fusion uses surround-view cameras and ultrasonic radars. When active, it will detect parking spots by “seeing” parking space lines. It will then search for, detect, and choose parking spots.
Nio said it would increase the ES8’s range. And in September, it will start delivering the EC6, a smart electric Coupe SUV.
Nio has focused on two growth drivers. First, it will continue seeking to expand its sales network. Having more dealerships will weigh on its costs. But the 200 dealerships it plans to add by the end of 2020 will support its sales growth. Second, Nio relies on users’ referrals to support its sales growth. As long as customers are satisfied and Nio keeps adding features they need, management expects users’ referrals to increase.
Nio’s minimal gross margin increase, despite higher sequential sales volume, is a concern. Sales of the base version of its ES6 vehicle lowered its average selling price. Since its ES8 sales did not increase, its gross margin did not rise by much. If the company’s sales mix changes for the better, so will Nio’s margins.
Valuation and the Bottom Line on Nio Stock
Investors who forecast a perpetuity growth rate of only 1.5% and use a five-year discounted cash flow growth exit model will assign Nio stock a value of $3.40 (click on this link to test different assumptions on finbox.io). That is in-line with the average analyst price target of $3.50 per share.
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 original insight that helps improve investment returns. As of this writing, the author did not hold a position in any of the aforementioned securities.