Make no mistake about it. NIO (NYSE:NIO) stock is one of the best stocks to buy right now.
The bull thesis is shockingly simple.
Once labeled the “Tesla of China,” premium electric vehicle (EV) maker NIO lost its hype in 2019. Some of the core reasons for this include a crumbling Chinese auto market, plateauing Chinese EV sales, plunging demand for NIO’s vehicles, widening losses and a crumbling balance sheet.
But everything has changed in 2020.
China’s auto market is rebounding. Chinese EV sales are soaring again. Demand for NIO’s vehicles is surging higher. Losses are narrowing. The balance sheet is beefed up with cash.
All of these favorable trends will persist in the back-half of 2020. Indeed, they will actually accelerate. As they do, NIO’s stock will roar higher — likely all the way back to $10, implying 100%+ upside potential.
Here’s how that happens.
Trends Changing Course
In 2019, every trend related to NIO was running counter to the company. Now, all those trends have reversed course, and are running parallel to the company.
- China’s auto market is rebounding. In April 2020, for the first time in nearly two years, China’s auto sales posted positive growth.
- Chinese EV sales are soaring again. After plateauing in 2019 and plunging in early 2020 thanks to Covid-19, China’s EV sales are once again setting monthly record highs.
- Demand for NIO’s vehicles is surging higher. NIO vehicle deliveries doubled in both March and April, and are expected to rise more than 150% in the second quarter.
- Losses are narrowing. NIO’s adjusted net loss narrowed by more than 40% in the first quarter of 2020.
- The balance sheet is fortified. A group of strategic investors, led by Hefei City Construction, poured RMB7 billion of cash into NIO in late April.
Accelerating Favorable Change
All of these favorable trends will only accelerate over the next few months.
China’s auto market will continue to rebound on the back of robust fiscal and monetary stimulus, pent-up consumer demand and deescalating trade and virus anxieties.
The EV trend will gain momentum, as the entry of Tesla (NASDAQ:TSLA) into the Chinese marketplace supercharges EV awareness and demand, at the same time that a pause in EV subsidy cuts in China makes EVs a more attractive economic option.
Concurrently, demand for NIO’s vehicles will surge higher since the company is “the brand” when it comes to premium Chinese EVs, and demand/awareness for premium EVs will grow as China’s entire EV market matures. It also helps that NIO will commence deliveries of a new car, the EC6, in 2020.
As was the case with Tesla, increased sales volume at NIO over the next few quarters will drive positive operating leverage, higher margins and narrower losses. Narrower losses will enable NIO to avoid ever going back to having a cash-strapped balance sheet.
100%+ Upside Potential
As NIO benefits from an acceleration in its underlying growth trends in the back-half of 2020, NIO stock could soar by 100% … or more.
Long-term, I see NIO as a niche but strong player in China’s huge EV market, serving China’s upper-income demographic with very advanced, very expensive and very exclusive premium EVs.
The upper and upper-middle income bands in China account for about 10% of the total population. Thus, in a competition-less world, NIO could realistically achieve 10% share in China’s EV market.
Of course, NIO doesn’t operate in a competition-less world. Instead, the company will run into significant competition from Tesla.
Still, consumer preference for the “home grown” brand coupled with potential government incentives, which could drive consumers toward buying NIO cars over Tesla cars, will likely drive NIO to control about half of China’s premium EV market at scale.
Assuming so — and further assuming NIO can achieve Tesla-like 20% gross margins with a mitigated opex base — then my modeling suggests that $1.20 in earnings per share is a doable target for this company by 2030.
Based on a market-average 17-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for NIO stock of nearly $9.
Stocks on fire tend to shoot above their fair value. As such, I realistically see NIO stock making a run towards $10 in 2020.
Bottom Line on NIO Stock
NIO stock is one of the best stocks to buy for explosive gains in the second-half of 2020.
Improving economic conditions, coupled with rising EV awareness in China and tremendous brand momentum from NIO, will revitalize the bull thesis in this company as the “Tesla of China,” and spark enormous gains in NIO stock.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NIO.