Ignore Short-Term Pain in Nio Stock As the Long-Term Case Remains Intact

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Will stronger than expected first quarter earnings be the spark needed to ignite the stock of Chinese electric vehicle maker Nio (NYSE:NIO)?

Image showing a Nio store with a glowing logo on the front.

Source: Andy Feng/Shutterstock.com

Investors sure hope so.

There hasn’t been much to be happy about with NIO stock lately. Since Jan. 11, the share price has dropped 34% and is now languishing just above $40. The stock is nearly 40% below its 52-week high of $66.99 a share.

After an astounding 1,400% run between April and December of last year, it appears that Nio has had the plug pulled on it. However, with production ramping up, sales growing strongly and plans to expand into Europe, there’s reason to believe that China’s answer to Tesla (NASDAQ:TSLA) can revive its stalled share price and get it firing again on all cylinders.

Back On Track

To be fair, Nio has been the victim of some things out of its control. Investors shifting money out of growth stocks and putting it into value and cyclical stocks has hurt Nio, which was one of the best performing stocks of 2020.

Investors taking a step back from the entire electric vehicle space after months of blindly throwing money at every start-up that came along has also slowed Nio’s momentum. That said, Nio’s fall from its 52-week high in January came after the company whiffed on the earnings expectations of analysts for the fourth and final quarter of 2020.

Nio needs to knock it out of the park on its first quarter earnings to win back the confidence of investors. The company has provided guidance for first-quarter revenues of $1.13 billion to $1.16 billion, which would equate to year-over-year growth of 438% to 451%, respectively. These estimates align with Nio’s 423% year-over-year rise in the number of vehicles it delivered in the first quarter, reaching 20,060 vehicles.

Meeting or exceeding its own targets will no doubt cause a big boost in NIO stock. The wild card in all of this is the global semiconductor shortage that has impacted automotive production around the world. How the shortage will impact Nio’s production remains to be seen.

Innovative Business Model

Not only does Nio offer consumers several stylish electric sedans and crossover vehicles, including the EC6 and ES8, but the company is pioneering an innovative business model that pushes “battery-as-a-service (BAAS).” This model enables customers to purchase Nio vehicles without any batteries at lower upfront costs. After buying a vehicle, consumers then purchase batteries through a monthly subscription service. Rather than rely on onerous charging stations that can take hours to recharge a vehicle battery, Nio owners can swap an uncharged battery for a fully charged one, or an upgraded battery, in only a few minutes.

While Nio’s battery-as-a-service model might sound strange to some, the company is aggressively pushing it throughout China. The company now operates nearly 200 battery swapping stations throughout mainland China, and has announced a target to have 500 of these stations operational by the end of this year.

Analysts applaud the model, noting that, as Nio sells more vehicles, its battery-as-a-service revenues will grow. Analysts also like that BAAS revenues are recurring.

Global Expansion

Nio is in a good position to grow both at home in China and abroad. The company has announced plans to expand into Europe in this year’s second half, which will provide the company with a huge new market. At the same time, China remains the world’s biggest market for electric vehicles.

In fact, China is far ahead of the U.S. and other countries when it comes to the adoption of electric vehicles. In 2020, China accounted for 41% of worldwide electric vehicle sales. And, while electric vehicle sales are expected to account for 9% of all automotive sales in China this year (2021), that percentage is forecast to grow to 35% by 2025.

While Nio faces growing competition at home and abroad, the company is streets ahead of its rivals in terms of production and deliveries. With more than 20,000 electric vehicles delivered to customers each quarter, Nio remains the main competitor to U.S. electric vehicle maker Tesla when it comes to a share of the global electric vehicle market – a market that is still developing and maturing but is forecast to be worth $1.3 trillion by the year 2030.

Buy NIO Stock Before the Next Leg Up

Investors who remain bullish on NIO stock like to say it is simply consolidating before the next leg up. And the shares do look undervalued at current levels if the price target on the stock is to be believed. The median price on Nio shares is $60, with a high estimate of $81 per share. The median target implies a potential gain of 45% from the stock’s current price of $41.31 a share. It’s worth noting that the current share price is not much higher than the low estimate on the stock of $38.80.

Much depends on Nio’s first quarter earnings results that are to be released on April 29. Should the company beat expectations, then the current price of NIO stock could represent a bottom and investors will benefit from a strong move to the upside. Disappoint, and Nio’s stock could slump even further. However, regardless of the short-term fluctuations, Nio stock still has a positive long-term outlook thanks to accelerating production, an innovative business model and huge global sales potential.

Nio stock remains a buy.

On the date of publication, Joel Baglole held a long position in NIO.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia. 

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.


Article printed from InvestorPlace Media, https://investorplace.com/2021/04/ignore-short-term-pain-in-nio-stock-as-the-long-term-case-remains-intact/.

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