I always talk about Tesla (NASDAQ:TSLA) stock as the bitcoin of equity markets. In terms of market capitalization, Ethereum ranks second in the cryptocurrency market. Therefore, Nio (NYSE:NIO) stock has to be the Ethereum of equity markets.
In the last year, NIO stock skyrocketed by more than 1,600%. Amidst profit booking corrections, I expect the stock to remain in an uptrend through the current year.
Let’s discuss the reasons to be bullish on Nio stock.
There Are Plenty of Tailwinds
Before talking about Nio, it’s important to acknowledge the industry tailwinds. If growth estimates hold true, the EV industry is likely to have a strong decade. Not just the current year.
To put things into perspective, it’s expected that EV sales in China for 2021 will be 1.8 million units. This would imply another good year for the likes of Nio, XPeng (NYSE:XPEV) and Li Auto (NASDAQ:LI).
Further, EV sales is approximately 5% of global car sales. B2025, EV sales will increase to 10% of passenger vehicle sales. Robust growth is likely to sustain and EV sales will rise to 58% of total passenger vehicle sales by 2040. Another interesting forecast is that China and Europe will contribute to 72% of global EV sales by 2030.
Given this forecast, I am bullish on Nio. The company has established a strong reputation as a premium car maker and vehicle deliveries are surging.
Bullish Triggers For Nio Stock
Nio recently reported vehicle deliveries for the fourth quarter of 2020, which was higher by 111% as compared to the previous year. Even for the full year, the company’s vehicle deliveries increased by 112.6%. With robust numbers, I am bullish on Nio stock trending higher. In particular, I see the following business growth triggers.
- For Q3 2020, the company reported operating level loss of $139.3 million. Operating losses declined by 60.7% on a year-over-year basis. As vehicle deliveries increase, I believe that operating level profitability is likely in the next few quarters. This is a key positive trigger for the stock.
- Nio is targeting the launch of sedan models in the current year. In addition, the company has plans to introduce a new model each year going forward. Nio has a robust cash buffer to accelerate spending in innovation and new models. Introduction of new cars would potentially imply sustained growth in vehicle deliveries.
- Nio is targeting entry into selected European markets in the second half of the year. As I discussed earlier, Europe and China will account for bulk of EV sales by 2030. Therefore, entry into Europe is likely to boost vehicle sales. XPeng, another Chinese EV company, has already launched its electric SUV in Norway.
- Nio launched Battery as a Service (BaaS) in August 2020. The penetration of BaaS touched 40% of new orders in December 2020. The key reason is that car purchases have to make a significantly low upfront payment when opting for BaaS. A 70-kWh battery pack for only 980 yuan per month. I believe that BaaS will continue to drive higher sales for Nio in the coming quarters.
With these factors in consideration, I believe that Nio stock is worth holding for the medium to long-term.
Concluding Thoughts On Nio Stock
The competition in the electric vehicle segment is likely to be intense in the coming years. At some point of time, there will be consolidation in the sector.
However, Nio is well positioned to survive and grow. Once the company turns free cash flow positive and is internally funded, value creation can be significant. I see that happening in the next 24 months.
It’s worth noting that Nio stock surged to $55 before correcting to $40 level. The stock has again bounced back to nearly $59 and looks set for new all-time highs.
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 more than 1,500 stock specific articles with focus on the technology, energy and commodities sector.
