Considering the various estimates of electric-vehicle adoption, the bull market for EV stocks might have just started. Once Nio addressed the concerns about its finances, it didn’t take time for Nio (NYSE:NIO) stock to skyrocket from $3.20 to $66.90. As a result of these points, there’s a good chance that its shares will surge over the longer term.
Nio’s massive rally, however, was followed by a sharp correction, and Nio stock closed yesterday at $34.19. I believe that investors who missed the first rally have a good opportunity to accumulate Nio at its current levels.
I also believe that the chip shortage and its impact on sales growth in the near-term is largely discounted by Nio’s shares after the correction. The median 12-month price target set by 19 analysts on Nio stock is currently $59.18. Clearly, the name seems to be attractive.
Strong Cash Flow Potential
At the end of April, Nio reported its first-quarter results. An important highlight was the company’s vehicle-level margin of 21.2%. During the same period a year earlier, its vehicle-level margin was -7.4%. Even on a quarter-over-quarter basis, the company’s vehicle level margin has improved.
XPeng’s (NYSE:XPEV) Q1 vehicle margin was 10.1% . Li Auto’s (NASDAQ:LI) Q4 vehicle margin came in at 17.1%. Therefore, Nio’s margin is superior compared to that of its peers. With the company’s operating leverage and the benefits of its battery-as-a-service initiative, it’s likely that the firm’s vehicle-level margin will continue to improve.
It’s also worth noting that the company’s operating loss was 295.9 million renminbi in Q1, compared to 1.6 billion renminbi during the same period a year earlier. The company is therefore well-positioned to report an operating profit in the next one to two quarters.
As a matter of fact, the company’s Q1 operating cash flow was positive. As its vehicle deliveries continue to climb, I expect its operating cash flows to jump. The visibility of those increases is a key factor that’s likely to trigger gains by Nio stock.
Growth Beyond China
Nio has ambitious international expansion plans. That is another reason to be bullish on the growth of its vehicle deliveries.
Initially, the company is likely to sell its cars in Norway. However, it’s very likely that Nio will aggressively expand in Europe in the next few years.
Last year, EV sales in Europe jumped by 137% despite the pandemic. Therefore, the market is attractive and can contribute to Nio’s vehicle delivery growth and margin expansion.
Earlier this year, Deutsche Bank analyst Edison Yu talked about Nio having a job posting on LinkedIn for someone to “formulate an action plan to enter the US market.”
It’s worth noting that Nio will be launching its first sedan, the ET7, in fiscal 2022. That EV is likely to take on Tesla’s (NASDAQ:TSLA) Model S. I will not be surprised if Nio enters the U.S. with the ET7.
As Nio’s international expansion causes its addressable market to increase, the company’s growth outlook will improve, resulting in large increases in its valuation.
From a financial perspective, Nio reported cash and equivalents of $7.3 billion as of March 2021. With positive operating cash flows and a healthy cash buffer, the company is well-positioned for aggressive expansion and major investments in research and development.
The Bottom Line on Nio Stock
The electric-vehicle sector is getting increasingly competitive. Traditional automakers like General Motors (NYSE:GM) and Ford (NYSE:F) have committed to gradually move, over the next decade, to selling only EVs.
However, the EV market is expected to grow at a compound annual growth rate of 29% over the next ten years. Even with the intense competition in the sector, multiple players will survive and grow. With its focus on innovation and technology, Nio, is well-positioned to grow sustainably.
Therefore, the recent correction in Nio stock is a good buying opportunity for long-term investors.
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. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
