Nio Stock Has Big Upside Potential

In the world of cryptocurrencies, any rally in Bitcoin (CCC:BTC-USD) is followed by upside in altcoins. Things seem similar for electric vehicle stocks where Tesla (NASDAQ:TSLA) is comparable to Bitcoin. With TSLA stock surging to all-time highs, it’s not long before other electric vehicle stocks follow. Nio (NYSE:NIO) is often referred to as the Tesla of China. Nio stock has been subdued for year-to-date 2021. However, a break-out on the upside is imminent and the stock is worth accumulating.

A Nio (NIO) sign and logo on a tan concrete building.
Source: Sundry Photography /

Let’s discuss the factors that make Nio stock a potential value creator.

It’s worth noting that Nio delivered 3,667 vehicles in October 2021. On a year-on-year basis, vehicle deliveries declined by 27.5%.

However, the decline in deliveries was due to restructuring, upgrade of manufacturing lines and preparation of new product introduction. I believe that the markets are likely to focus on the potential growth coming in 2022. That’s likely to be a catalyst for stock upside.

In terms of industry tailwinds, the Central government is targeting 20% of new cars sold to be new energy vehicles by 2025. William Li, founder and CEO of Nio, believes that 90% of new car sales will be electric vehicles by 2030.

These might be ball-park estimates. The key point is that the industry is positioned for steady growth over the next decade. Nio seems to be one of the players that’s positioned to survive competition and grow.

Nio Positioning for Industry Consolidation

The number of electric vehicle companies in China have surged in the last few years.

Bain & Company’s Helen Liu believes that “consolidation in the sector cannot be avoided.” With fierce competition, Liu also opines that “nobody knows who actually is going to survive in the end.”

China’s minister for information and technology, Xiao Yaqing, also opined that the “EV sector is too fragmented and in dire need of consolidation.”

Clearly, consolidation seems to be on the cards. In all probability, Nio is likely to be among the few survivors.

It’s worth noting that as of Q2 2021, Nio reported a healthy cash buffer of $7.5 billion. The cash buffer was sufficient for funding medium-term growth plans.

However, in September 2021, Nio announced an at-the-market offering of $2.0 billion. It seems clear that Nio is preparing for some big investments. These investments can be potential acquisitions to boost manufacturing capabilities.

Another important point to note is that Nio reported vehicle margin of 20.3% for Q2 2021. Vehicle margin for Q2 2020 was 9.7%. With growth in deliveries, it seems likely that margins will continue to improve. In the next few years, operating cash flows will provide additional financial headroom for aggressive growth.

Bottom Line

For Nio, growth is not limited to China. The company has already launched its ES8 electric SUV in Oslo. Further expansion in Europe is likely in Germany and the Netherlands. International expansion will ensure that vehicle delivery growth remains robust in the coming years.

Considering the company’s cash buffer, it seems likely that Nio will expand in all key European markets in the next 12-24 months. Nio already has a manufacturing agreement with Jianghuai Automobile Group.

The latter will be expanding its annual production capacity to 240,000 vehicles to meet the growing demand. Therefore, other than chip concerns (which is temporary), I don’t see any challenge in terms of manufacturing capacity in 2022.

Another factor that makes me bullish on Nio stock for 2022 is the new launch line-up. In the coming year, the company plans to deliver three new products based on Nio Technology Platform 2.0. One of the products is expected to be a lower priced sedan. This can significantly boost the delivery volume.

With these factors in consideration, Nio stock looks attractive after under-performing almost through 2020. I would not be surprised if the stock is among the top performing electric vehicle stocks in the next few quarters.

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 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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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