Louis Navellier is rating this stock an “A” – Get In Now!

On May 24, the man who found “the stock of the century” will reveal one of his top stocks for 2022 – for FREE – in a special presentation.

Tue, May 24 at 4:00PM ET
 
 
 
 

A De-Risked Story Means Nio Stock Can Keep Gaining

There are two ways a stock can move higher, and Nio (NYSE:NIO) stock has benefited from both so far in 2020.

Image of Nio (NIO) logo branded on the exterior of a corporate building.

Source: Sundry Photography / Shutterstock.com

The first is through improving future prospects. In theory, a stock price should be equal to the net present sum of all of its future cash flows. If the market believes those cash flows will be higher than previously thought, the stock price should, in turn, rise.

Obviously, this theoretical movement has played out in practice for NIO stock. NIO has more than quadrupled so far this year. Optimism toward electric vehicles more broadly, along with strong sales results from Nio itself, both have been key drivers. Investors are seeing potentially bigger profits, and thus, a higher stock price in a blue-sky scenario.

But there’s a second, less covered, and less obvious, way in which a stock can gain. And that’s through lower risk.

If I offer you a 50/50 bet that pays $10 if you win, and $0 if you lose, you’d want to pay something less than $5 for that bet to be profitable. But if the rewards stay at $10, while the downside drops to $4, a price below $7 now looks more attractive.

In that simplistic hypothetical, the rewards didn’t change — the risk did. The same holds for the NIO story at the moment. And thanks to a pair of big deals, Nio has significantly lowered the risk surrounding its stock.

Overall, that not only helps explain why NIO stock has gained this year, but why there’s plenty of room left in the rally.

Less Risk…

It’s important to remember that as recently as this year, some analysts were arguing that Nio had a real chance of going into bankruptcy. As the novel coronavirus pandemic hit China, the company had to delay payroll by six days. Soon after, the company raised $100 million in convertible notes — which converted into NIO stock at a price of just $3.07 per share.

Bears argued that the raise wasn’t enough, and they were right. But Nio wasn’t done.

In late April, Nio secured $1 billion in funding from a group of Chinese investors. The deal was dilutive to Nio shareholders — the new investors received a 24% stake in Nio China — but it significantly minimized worries about cash burn.

More importantly, it gave Nio the flexibility to aggressively attack its market. A company can’t grow and pinch pennies at the same time. And so it’s little surprise that NIO stock has gained so nicely since the deal was announced. Indeed, InvestorPlace’s Matt McCall argued at the time that the capital raise was a key catalyst for the stock.

But even then, Nio wasn’t done. The company raised another $400 million through an equity offering in June. Another stock sale this month brought in an additional $1.7 billion.

Thus, the cash worries now are gone. And Nio has dry powder to accelerate its growth. It can look to bring manufacturing in-house after those plans reportedly were shelved last year. It can expand aggressively into new cities in China.

At the very least, a company with real bankruptcy risk just eight months ago is on firm footing. Again, that alone should move, and has moved, NIO stock higher.

…and More Reward

Of course, the big year-to-date rally in NIO stock isn’t just a matter of bankruptcy risk being taken off the table. Nio is starting to deliver on its potential as well.

As McCall wrote last month, the second quarter earnings report showed that the company is nicely on track. Vehicle gross margins have moved into the black, and should improve further.

Meanwhile, deliveries just keep rising. In July, Nio delivered over 3,500 vehicles, more than quadruple the year-prior total. The company tacked on 100%-plus year-over-year growth in August with nearly 4,000 deliveries, up 12% month-over-month.

Simply put, Nio is on an upward trajectory. The impacts of the pandemic clearly have receded, and now Nio is moving toward leadership of the high-end electric vehicle market in China. As a result, further success would seem to imply that the current market capitalization of $25 billion is too low.

NIO Stock Isn’t Zero-Risk

All told, NIO still looks like a buy, even after the big gains so far this year. And with bankruptcy risk off the table and execution impressive to this point, there’s little reason the rally can’t continue.

That said, it’s worth making the point that a lower-risk story isn’t a zero-risk story. Nio still isn’t profitable. Chinese stocks have had their issues on occasion. And auto manufacturing (even when that manufacturing is outsourced, as is currently the case for Nio) can be a tricky business.

But all stocks have some risks. Few have the opportunity that Nio does. So far in 2020, the company has positioned itself perfectly to take advantage of that opportunity, and taken the first steps toward becoming a market leader. As long as those trends continue — and I believe they will — NIO stock can and likely will keep rallying.

The InvestorPlace Research Staff member responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in the article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/10/de-risked-story-means-nio-stock-keep-gaining/.

©2022 InvestorPlace Media, LLC