Towards the end of fiscal year 2019, Nio (NYSE:NIO) was struggling for financing and the stock hit lows of $1.19. To be honest, I didn’t expect the stock to be even close to $21 it’s at today. However, fresh infusion of funds in the company has been a game changer.
Even after a 1,530% upside from lows, Deutsche Bank is talking about a target price of $24. Deutsche Bank analyst Edison Yu believes that Nio is “the leader of the pack in the fab four.” This includes Xpeng Motors, WM Motor and Li Auto. I agree with this view and I believe that Nio can indeed be the Tesla (NASDAQ:TSLA) of China in the coming years.
For investors willing to hold the stock with an investment horizon of three to five years, a price target of $100 is not unrealistic. Let’s discuss some of the factors that make Nio worth considering even after the massive rally from lows.
The first reason to be bullish on the company is industry tailwinds. Between the current year and FY2025, China’s electric vehicle industry is expected to grow at a CAGR of 25%. Even if the company’s earnings growth is in-line with industry growth, the stock is attractive.
Further, government policies are intended towards boosting EV sales. State level subsidy for new energy vehicles has been extended to FY2022. For the current year, 2.7 billion yuan is being invested in boosting the charging infrastructure. These initiatives will act as industry growth catalysts.
BaaS Likely to Be a Game Changer
Last month, Nio announced the launch of battery as a service (BaaS), which can be a potential game changer in terms of vehicle delivery growth.
The BaaS model “allows users to purchase electric vehicles and subscribe the usage of battery packs separately.” One of the biggest advantages is the deduction in purchase price for users opting for this model.
As an example, the ES8 is priced as 468,000 yuan. The price, on subscription to the BaaS model, declines to 380,000 yuan. In addition, an individual would need to pay 980 yuan as a monthly subscription fee for the battery pack. The company has already deployed 143 battery swap stations across 64 cities in China.
With consumers having to pay a significantly lower price (adjusted for subsidy and Baas model), I expect vehicle sales to increase in the coming quarters. It’s also worth noting that the BaaS model will allow Nio to compete against the Tesla Model Y in terms of pricing.
I want to go back to the view of Deutsche Bank analyst Edison Yu that “we continue to see compelling evidence that Nio is increasingly perceived by customers as a high-quality premium brand with best-in-class technology and service.”
Since I am talking about competition, this factor gives Nio the edge in a high growth market.
Other Upside Triggers For Nio Stock
Nio has already been reporting robust delivery numbers for the last few months. In August 2020, the company delivered 3,965, which represented an increase of 104.1% on a year-on-year basis. As vehicle deliveries continue to increase, Nio is well positioned to deliver profit at operating level in the coming quarters. I see this as a major trigger for further upside in the stock.
With ample liquidity post the financing, Nio is also looking to go global. The company is expecting to enter Europe in the second half of FY2021. Europe has been expanding its market share in the EV segment and is the second-largest market after China. It’s worth noting that Tesla is already setting up a Gigafactory in Europe. This is an indication of the potential the region holds for EVs.
It is also being speculated that Nio will release semi-autonomous technology in October 2020. This will allow consumers hands-free driving. Clearly, Nio is matching-up with Tesla in terms of technological advancement.
Given the factors discussed, Nio is well positioned for strong growth in the coming years. As vehicle deliveries continue to increase, operating level profit will drive the stock higher.
In addition, growth in China coupled with global growth will ensure that Nio continues to report healthy financials. With the company positioned as a luxury brand, Europe can be an attractive market.
Overall, the next five years are likely to be game changing for Nio with positive industry tailwinds. Investors have seen how Tesla surged and Nio can repeat the story if the current growth trajectory sustains.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.