Over the last six months, I have seen several altcoins surging by 1000%. So, when it comes to electric vehicles (EVs) Nio (NYSE:NIO) has been no less than that in my opinion — a top alternative to Tesla (NASDAQ:TSLA), the bitcoin of the EV industry. Nio stock has surged by 1001% in the last six months and by 1965% in the last year.
At almost $47 right now, though, I would avoid buying Nio. However, any correction in the range of $42 or lower would be a golden entry opportunity. The stock can still give multi-fold returns over a time horizon of three to five years.
In the past, the biggest challenges for Nio were financing and reducing cash burn. But these headwinds have been navigated. With secular industry tailwinds, the company is now well-positioned to deliver strong numbers on a consistent basis.
Of course, it’s not just the industry growth factors that makes me bullish on Nio stock. Deutsche Bank’s Edison Yu believes that the EV maker could be an “Iconic Brand” in the coming years. I agree.
Nio Stock’s Positive Triggers from Q3
Recently, Nio reported strong third-quarter results for 2020. Out of the report, though, I believe that the following factors are most important to note. That’s because they are likely to ensure that the positive momentum of Nio stock continues.
For one, vehicle margin for Q3 2020 was 14.5%, as opposed to the negative vehicle margin of 6.8% in Q3 2019. Even on a quarter-on-quarter basis, the company’s vehicle margin has improved. As vehicle deliveries increase, I expect margins to remain strong.
However, one of the biggest challenges for Nio in the past was cash burn. For Q3 2020, the company achieved positive operating cash flows (OCFs). This was the second consecutive quarter of positive OCF. In addition, it reported $3.3 billion in cash and equivalents. With a healthy cash buffer and growing cash flows, the company is nicely poised from a balance sheet perspective to aggressively invest in growth.
On top of the cash, the EV maker also reported delivery of 12,206 vehicles for Q3. Plus, for the last quarter of the year, Nio provided guidance projecting delivery to be in the range of 16,500 to 17,000 vehicles. Therefore, the strong revival momentum seems like it will keep going.
Finally, it’s worth noting that the vehicle sales growth has been in spite of the pandemic and its slowdowns. As such, the potential vaccine coming in 2021 could trigger even higher economic growth. All signs point to sales numbers continuing to outperform on a year-over-year (YOY) basis.
Growth Outlook and Competition
Besides economic growth, the launch of a new model in the coming year could also trigger more vehicle deliveries. Nio is planning to introduce its first sedan model on its “next vehicle platform called the NP2.” What’s more, management indicated on the Q3 conference call that a “second new product in the pipeline is also going to be a sedan.” Therefore, the company will have a portfolio of three SUVs and two sedans, possibly by the end of fiscal year 2021.
Additionally, Nio will likely expand into Europe by the second half of the coming year. This will also help boost unit deliveries.
Specific to China, though, the EV market competition is intense. However, that’s unlikely to impact the company’s growth in the near future. It’s been noted that most EV companies have their own distinctive labels that set them apart:
“Tesla uses technology as the label, NIO uses luxury brand as the label, Li Auto uses large SUV as the label, and XPeng uses automatic driving as the label.”
China is targeting new energy vehicle (NEV) sales to be 20% of total car sales by fiscal year 2025. Further, by 2035, NEV sales are targeted to be 50% of total car sales. Given the market potential, multiple players can grow at a strong pace. That includes Nio stock.
Bottom Line
Even with the best of news or tailwinds, a stock that has surged by over 1,000% in six months is likely to correct. Nio stock has already begun to drop from its new highs. So, I would look for a good entry point during the recent adjustment.
However, the long-term rally for this name is far from over. In the coming quarters, operating cash flow will swell. Further — when Nio is free cash flow positive — there will be an additional trigger for stock upside. Plus, the company’s new model launch in 2021, its expansion into Europe and further developments on autonomous driving will all keep the markets excited.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
