When electric vehicle valuations soared at the beginning of July, Nio (NYSE:NIO) broke out to new highs. In the last few weeks, Nio stock is stuck in a trading range.
Bulls and bears are fighting to send the stock beyond the $12 – $16 range. Short-float is 12.72%, a worrisome level for Nio shareholders.
With the stock going nowhere for now, what should investors look for next? What will send Nio shares higher from here?
Q2 Positive for Nio Stock
Nio posted strong second-quarter deliveries. Revenue topped $526.4 million as the EV maker delivered 10,331 ES8 and ES6. Vehicle margins swung to positive territory at 9.7%, compared to negative 24.1% last year.
Nio’s negative $44.3 million in gross profit suggests that the company is on the cusp of profitability. To get there, it needs to sustain its vehicle sales momentum for the next few quarters.
More recently, Nio announced unit deliveries rose three-fold (322.1%) year-on-year to 3,533 vehicles. The majority of deliveries are ES6, a 5-seater premium EV. On July 24, Nio launched the EC6. The SUV is a potential hit with customers.
If the trend of high demand for SUVs in the U.S. is a leading indicator, investors should expect strong sales of the EC6 in China. On its news release, Nio said the EC6 has a 160 kW motor. It has an electric all-wheel-drive system and accelerates from 0 to 100 km/h in just 4.5 seconds.
Consumers who opt for an optional 100 kWh battery pack will have a 615 km range. In China, customers may not need such a long-range. Still, the high capacity adds to the convenience. So, strong demand for the long-range EC6 might lift Nio’s operating margins when it releases a new model next month.
Positive Catalysts for NIO Stock
Having high liquidity is always a positive development. Nio operates in a highly capital intensive industry. It needs cash to buy raw materials and build the product before customers take delivery.
On June 29, the company announced a cash infusion from investors. This includes agreements with Hefei City Construction and Investment Holding and CMG-SDIC Capital.
That same month, Nio sold 72 million Class A shares for just $5.95 per American depositary shares (ADS). The additional overallotment was 10.8 million ADS. It now has more than enough cash to fund its working capital needs.
Nio faced lower year-on-year research and development expenses. Last year, the company needed to increase spending to pay for the rigorous testing activities of ES6. This is in connection with the voluntary battery recall in Q2/2019.
Sales, General, and Administrative (SG&A) expenses fell 34.1% Y/Y. Nio’s cost-saving efforts and higher operating efficiency lowered SG&A. Looking ahead, improved efficiency implies higher marketing and support returns. After posting losses every quarter, the falling cost structure is welcome news for investors.
Expanding its reach globally is Nio’s next step for accelerating its business growth. CEO William Li describes the company as a global setup. It has offices in San Jose USA) and offices in Germany.
The company is in the early phases of global expansion. It needs to plan its marketing, build a team, and product launch first. Chances are good that Nio could take sales from Tesla (NASDAQ:TSLA). For now, Tesla is the reigning champion in EV sales.
Wall Street is bearish on Nio. Although a Merrill Lynch “buy” call is encouraging (per Tipranks), the average price target is $10.28. Nio shares could move in either direction.
When does it break to the upside? Until the company posts profits for at least two quarters in a row, investors may only expect the high volatility to continue.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.