Red-hot NIO (NYSE:NIO) stock dropped sharply in early September in sympathy with a broader tech stock rout that dragged the Nasdaq down as much as 5% on Sept. 3. The sell-off in NIO stock, however, comes despite the company reporting strong August deliveries of 3,965 – up 12% month-over-month and up 104% year-over-year.
In other words, NIO stock is dropping, but the fundamentals are only getting better.
This would make sense if shares were exceptionally overvalued – but they’re not. To that end, recent weakness in NIO stock is nothing more than a buying opportunity.
Here’s a deeper look.
Strong August Deliveries
Nio just reported August delivery numbers, and they provided more evidence that the Nio growth story is ramping very quickly in a rebounding Chinese auto market.
Specifically, August deliveries came in at 3,965, up 12% month-over-month and 104% year-over-year. Those numbers largely put the company on track to hit or beat third quarter delivery guidance of 11,000-plus vehicles (up 130%-plus YoY). This is mostly because Nio is set to start delivering its new vehicle, the EC6, in September (and that should juice overall deliveries by several percentage points).
This is now Nio’s fifth consecutive month of triple-digit deliveries growth. It comes against the backdrop of a Chinese auto market that has posted four consecutive months of sales gains.
Clearly, China’s auto market is rebounding, and Nio is rapidly expanding share in that rebounding auto market thanks to burgeoning premium EV demand.
Both of these trends will persist for the foreseeable future. China’s delivery volumes will continue to rebound on the back of low rates and easy credit. Nio will continue to expand share on the back of rising EV demand/awareness and new vehicle launches.
Thus, over the next few quarters, Nio will likely continue to report 100%-plus delivery growth. And that sustained huge growth should help power NIO stock higher.
Valuation Remains Tangible
In the big picture, the valuation on NIO stock remains tangible.
My long-term model on Nio makes the following the assumptions:
- China’s passenger car market retains huge volumes at 25+ million passenger cars sold every year, thanks to urbanization and population growth.
- EV penetration in China’s auto market soars to 35% by 2030, thanks to robust government support, rising consumer demand, falling EV prices, improving EV tech and more diverse supply.
- The premium vertical measures roughly 10% of the Chinese EV market, equivalent with the upper- and upper-middle-income’s population share in China.
- NIO leverages technology, branding, first-mover and home-turf advantages to control about half of China’s premium EV market, implying ~450,000 deliveries.
- Average sales prices on the cars hover around $50,000.
- Gross margins and operating margins rise to long-term targets of roughly 25% and 12%, respectively.
- Earnings per share rise toward $2.25 by 2030.
Under those assumptions, I value NIO stock at ~$18 today (using a 17X forward earnings multiple and 8.5% annual discount rate).
Importantly, that’s just the China business. My model assumes Nio does not go international with its cars. If the company does, that could add significant upside to my valuation.
All in all, then, the valuation on NIO stock today remains tangible, and shares continue to have attractive long-term upside potential.
Shares Taking a Breather
Why the sell-off in NIO stock then? Shares are just taking a breather. After all, NIO stock is up more than 350% year-to-date.
On the heels of such a huge rally in such a short time, you are bound to have some profit-takers. Just like you had some profit-takers back in July around the $11 to $12 range. And, just like then, today’s profit-taking will result in near-term consolidation, but ultimately end with another breakout higher in NIO stock.
So don’t run away from NIO stock amid recent choppiness. Instead, embrace the weakness. Buy the dips. And hold for the next leg higher.
Bottom Line on NIO Stock
NIO stock is a long-term winner, and one of the most attractive options to play the EV boom of the 2020s.
So don’t give up on the stock because it had a few bad days, after quadrupling in a few months.
Buy the dip. Weather the storm. Sell in five to 10 years. At prices much higher than where the stock trades today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.