Why Nio Stock Could Head to Over $40 Next

Investors that missed the nearly 20-fold return in Nio (NYSE:NIO) still have a chance. Nio stock rose 32.65% last week as markets continued to digest the strong Sept. and third-quarter delivery numbers.

Source: Sundry Photography / Shutterstock.com

If chances are low that Nio shares will break its uptrend that began in June, investors should continue accumulating the stock.

Nio Stock Lifted by Delivery Numbers

Nio posted strong September delivery figures. The 4,708 deliveries, up 133.2% from last year, is a record for Nio. The mix consisted of 3,210 ES6s, its 5-seater premium, and 1,482 ES8s, the 6-seater, and then 7-seater SUV. For the third quarter, Nio delivered 12,206 vehicles, up 154.3% from last year.

The strong growth is in stark contrast to the dark days when investors speculated that it would file for bankruptcy. Earlier this year, China locked down its economy to prevent a further spread of the coronavirus. Since then, Nio attracted investments and sold shares to raise cash. Its stock chart is up since then.

When it comes to investing in China-based companies, Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) come to mind first. Now, with Nio reporting another record monthly record of deliveries, the electric vehicle firm is a must-own company. Conservative investors may wait for shares to consolidate back to the 50-day moving average in the low $20s. But since Nio does not report quarterly earnings until next month, markets have no reason to take profits.

Analysts do not expect Nio to post a profit. Value investors will shy away from investing in the EV firm until after it does so. The risk is that when that eventually happens, the stock may keep rising and could trade $40 to $50 next. At a market cap of $38.7 billion, Nio is worth more than 10 times less than that of Tesla (NASDAQ:TSLA). Either Tesla’s market capitalization of $402 billion will have to fall or Nio’s will have to keep rising.

Risks

Re-emerging tensions between the U.S. and China may scare investors away from China-based companies. Still, Nio’s prospects depend on China’s growing economic strength. It would not get affected by any trade restrictions the U.S. imposes on the region.

Valuations are not yet meaningful until Nio starts posting operating profits.

In September, competitor XPeng (NYSE:XPEV) posted a 145% year-on-year increase in EV deliveries, to 3,478. For the third quarter, it delivered 8,578 Smart EVs. This is made of 6,210 P7s and 2,368 G3s. CEO He Xiaopeng said, “We are pleased to have achieved a record month of deliveries, which demonstrates our ability to execute our strategy, accelerate sales of our Smart EVs and expand our service and charging network.”

XPeng is a potential competitive threat to Nio. After Tesla cut prices of the Model 3 in China, XPeng may do the same, forcing Nio to lower prices, too. That would delay Nio’s path to profitability.

Fair Value

In a 5-year Discounted Cash Flow Growth exit model, assume the following metrics:

Metrics Range Conclusion
Discount Rate 9.0% – 7.0% 8.80%
Perpetuity Growth Rate 3.5% – 4.5% 4.00%
Fair Value $30.56 – $68.70 $35.31
Upside 7.3% – 141.2% 24.00%

Model courtesy of finbox

Nio is worth around $35 if investors assume a discount rate of close to 9%. Given the upcoming seasonal strength ahead, the stock could continue its strong run higher for the next two months:

Nio's seasonal performance is strong in November and December.

Nio’s seasonal performance is strong in November and December.

Chart courtesy of Stock Rover

Nio has a history of beating analyst consensus estimates:

Surprise Type Announce Date Period End Date Actual Est. Surprise (%)
EPS EPS
Positive 8/11/2020 6/30/2020 ($0.16) ($0.35) 54.30%
Positive 5/26/2020 3/31/2020 ($0.22) ($0.34) 35.30%
Negative 3/18/2020 12/31/2019 ($0.40) ($0.37) -8.10%
Positive 12/30/2019 9/30/2019 ($0.33) ($0.42) 21.4

Chart courtesy of Stock Rover

Chances are good that it will exceed market expectations again. That will give it a positive lift and will reward investors who hold the stock.

Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.


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