Investors may attribute the surging bullishness for Nio (NYSE:NIO) stock in July alone for two reasons.
Surging interest for electric vehicle suppliers sparked frantic buying for publicly listed stocks in this space, including Nio stock. Second, the renewed interest in China-based companies helped Nio close at yearly highs recently.
Access to a credit facility plus investments from bigger firms suggests that Nio’s bullish run will continue.
Credit Line Lifts Nio Stock
Nio announced on July 10 that it established a credit line worth 10.4 billion yuan from six Chinese banks. This will allow the company to support further business operations and development.
The financial support is in stark contrast to Nio’s low point late last year. At the time, demand for Nio vehicles slumped ahead of China entering a lockdown earlier this year. For months, Nio’s prospects looked dire because no one would or could buy its ES6 or ES8 models during an economic slowdown.
When China re-opened, orders for Nio EVs recovered. In June 2020, Nio delivered 3,740 vehicles, up nearly two-fold from last year. It delivered 1,264 ES8s and 2,476 ES6s. With the economy rebounding in China, investors may reasonably assume that deliveries will surge again this month and for the next quarter.
This chart on Nio’s moving average suggests a potential correction. If selling intensifies, wait for shares to settle in the $10 to $12 range first.
Nio said that investors increased their cash injection obligations in June. It received RMB4.8 million and will get another RMB200 million next. Nio said that it “will inject its core businesses and assets in China, including vehicle research and development, supply chain, sales and services and NIO Power, or together as the Asset Consideration, into NIO Anhui.”
The massive investment positions Nio to grow its electric power division and its EV business. Before business bounced back, Nio cut its retail presence and reduced its sales staff to save money. But because it maintained its research and development activity, it did not sacrifice product development.
Set for a Better Position?
The additional investments should allow Nio to develop better products, widening its moat.
If Nio sells better products than Tesla (NASDAQ:TSLA), chances are good that Nio will fare better in its home turf of China. Still, Tesla has lots of R&D activities that will lift EV sales in the region. But Nio is taking the right strategic direction to keep up with the leading brands. This should reverse its negative profit margins into positive territory in the quarters ahead.
I believe that Nio may reasonably post steady revenue growth over many years. After Nio posted revenue growth of around 60% last year, investors may reasonably expect the growth rate to continue for the next two to three years. As revenue growth drops to the teens in FY 2028, Nio’s stock could have a fair value of nearly $20.
On Wall Street, few analysts pay any attention to this company. The average price target is just $5.70. Analyst Fei Fang from Goldman Sachs downgraded the stock and rated it a “hold.”
Your Takeaway on Nio Stock
Anyone who bought Nio at $5.95 after the 72 million American Depositary Shares offering is in the green. Taking profits would solidify those trading profits. But if the stock keeps rising, those taking profits will miss out.
Protecting profits is the first goal for any investor. Market sentiment may change swiftly and the stock may fall sharply. For now, buying volumes are high enough to prevent a drop in Nio.
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, Chris Lau did not hold a position in any of the aforementioned securities.