When I covered Chinese electric car maker Nio (NYSE:NIO) in 2019, there was seldom much positive to say. Between self-inflicted wounds, global trade tensions, a stumbling Chinese economy, and the prospect of losing government electric car subsidies, 2019 was a tough year for Nio stock.
The company shed over 40% of its value during that difficult time.
2020 is proving to be a completely different story. Despite the challenge of the novel coronavirus pandemic which devastated China earlier this year, NIO is up nearly 284% so far in 2020. In July it hit an all-time record close of $14.98 — a level that would have been unthinkable a year ago.
Why the turnaround, and will it last? It’s time to do a little digging.
2019 Was Terrible in So Many Ways
It’s hard to downplay just how bad 2019 was if you were a Nio investor. There were battery fires and recalls of its most expensive model, the ES8 luxury SUV. Deliveries dropped. China’s economy cooled and auto sales entered an extended slump. The Chinese government announced it would cut EV subsidies, sending electric car sales into a free fall. A trade war between the U.S. and China threatened additional damage to the Chinese economy. Nio turned to corporate restructuring, spinoffs, layoffs, and even a bailout.
Making a bad situation worse, Tesla (NASDAQ:TSLA) opened its Chinese Gigafactory in December. Now Nio was going to be facing tough competition from Tesla’s Model 3, which was expected to be churned out for the Chinese market at the rate of nearly 10,000 cars per week.
Nio’s Fortunes Are Turning Around
Nio stock was mildly impacted by the March market turmoil, but quickly bounced back. However, it really wasn’t doing much until the start of July. The company published vehicle delivery numbers for the quarter ending in June, and they were strong. It exceeded its quarterly guidance for vehicle delivery and set a new monthly record for deliveries in June with 3,740.
On Aug. 3, Nio published a July delivery update. The 3,533 vehicles it delivered that month was a 322.1% year-over-year increase. This was its second-highest monthly number (after June), and was achieved despite disruption caused by flooding and a five-day shutdown to prepare for production of the new EC6, a premium smart electric coupe SUV.
On Aug. 11, Nio reported its Q2 earnings. Vehicle sales of $493.4 million were up 146.5% YoY. Margins for the quarter improved to 8.4% compared to negative 33.4% in Q2 2019. It’s still not profitable, but losses are narrowing. Also boosting the market performance of Nio was a “halo effect” from the performance of Tesla stock, which has gained 76% since the end of June.
NIO shot up 94% between the end of June and July 10. It was a little bumpy for the next month, but it’s still up 85% from the end of June.
Bottom Line for Nio Stock
It seems strange to be writing this, but Nio stock has been on the receiving end of multiple analyst upgrades this year. It received an upgrade to a buy rating from Goldman Sachs in June, followed by another upgrade to buy from China International Capital Corp in July. Last week, J.P. Morgan raised its price target for Nio shares.
That being said, the majority of investment analysts still remain cautious about Nio. You’re more likely to find a “hold” than a “buy” recommendation, and many analysts have a 12-month price target that’s roughly half of what shares go for today.
There’s no arguing that Nio is in a better position today than it was at this time last year. And with NIO shares up 284% so far in 2020, there’s no arguing that it’s been a standout stock so far this year. The problem is that there are still too many variables that are out of Nio’s control — and they are big variables.
Among them, Tesla is now established in China and competing for customers. There’s a big risk the coronavirus pandemic will kick off a global recession, and the trade war with the U.S. could heat up again at any time. A recession or a trade war would impact China’s economy and cut into luxury expenditures like Nio’s premium electric cars.
At its current value, which its nearing its all-time high from July, NIO seems a little too expensive given the risks. However, the company seems to have successfully navigated its way out of the danger zone and is positioned for a bright future. If it drops back below $10, it might just be time to snap up some shares.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
