Nio (NYSE:NIO) stock is riskier than ever. And that’s exactly why investors should scoop them up now.
That implies that they are deeply undervalued – they are – and that current market forces will abate. I believe that will occur.
No one can accurately predict when the pressures currently driving Chinese stocks lower will abate. But investors should rest assured that it is almost entirely broader fears, and not company specific issues, which is keeping Nio stock low.
And that makes a contrarian position in Nio even more valuable at present.
Broad Troubles
It’s no secret that China presents massive country-specific risk currently. A majority of that risk stems from the country’s serial crackdown on domestic industries. That crackdown began with the tech industry and worries that companies including Alibaba (NYSE:BABA) and Tencent (OTCMKTS:TCEHY) were monopolistic.
It then led to a hard realization that those companies’ respective fintech arms could rock the country’s financial sector. That prompted the country’s leadership to reevaluate unbridled growth in fintech leading to a crackdown.
The country enacted similar crackdowns on cryptocurrency following Bitcoin’s (CCC:BTC-USD) collapse in May, and then later on crypto mining. Next, China enacted harsh bans on private tutoring. By now, you may have forgotten that this was an article about Nio, an EV manufacturer.
That’s the point: Nio isn’t the issue here, the effects of an increasingly strict Chinese regulatory body on the stock market are.
Is the risk associated with investing in Chinese stocks high right now? Absolutely. That’s causing widespread trepidation on the part of investors. As a result, Nio, along with the stocks of its compatriot companies are dragged down.
However, based on the company’s recent earnings report, it’s a contrarian opportunity worth taking.
Maturing
Investors who look beyond those overarching fears will find a strong company. There are three important figures I’d like to highlight in understanding why Nio is essentially a steal right now: Those are deliveries, revenues and net losses.
Investors who compare Nio’s delivery numbers from 2019 and early 2020 to those in 2021 will see how quickly the company has grown. But they’ll also be doing themselves a disservice because the company was a much younger entity then. As an example, Nio sold 2.5x as many vehicles in Q3 of 2020 as it did a year earlier. That’s 150% growth.
Likewise, investors shouldn’t expect the 422% delivery growth it experienced between the first quarter of 2020 and 2021 to continue.
Rather, investors should take a look at Nio’s recent sequential quarterly results. In the last three quarters it has delivered roughly 17,000, 20,000 and 22,000 vehicles, respectively.
In its recent earnings report the company gave guidance of between 23,000 to 25,000 vehicle deliveries in Q3. That represents between 5% and 14.2% sequential growth.
That might not blow your socks off, but remember Nio stock carries a target price of $60 and trades for $38 right now.
Revenues and Net Losses for Nio Stock
That story of maturation that I just highlighted for vehicle deliveries also holds true for revenue growth: Compared to a year ago revenue growth is outlandishly high, but sequential revenue growth looks strong too.
Nio expects that its Q3 revenues to be somewhere between $1.38 billion and $1.492 billion. Those figures represent a much more modest 5% to 14% growth on a sequential basis.
It is therefore fair to expect more growth from this company. But it is also time to take a harder look at its net losses. Those net losses hit $90.9 million in Q2, up 30.2% sequentially. Adjusted figures which don’t include the effects of share based compensation were better, at $52 million, but concerning.
As Nio approaches net gains investors will rush in. And as China relents on its crackdowns, capital will return to Chinese stocks. That’s why investors should consider Nio stock at this risky juncture.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
