Nio Stock Is Well-Positioned for a Big Rally in 2022

In 2021, Nio (NYSE:NIO) stock has been an underperformer. During this period, the stock has declined by 31%. Regulatory headwinds in China, the chip shortage and new shares sold by Nio are some of the major reasons for the weakness of its shares. However, there are two important points to note.

A Nio (NIO) sign and logo on a tan concrete building.

Source: Sundry Photography / Shutterstock.com

First and foremost, Nio stock was trading at $3.70 at the end of 2019. Even after the shares fell meaningfully from their all-time highs of $67 earlier this year, Nio stock has still soared 800% in the last 24 months.

Furthermore, Nio’s fundamentals have improved recently.

I believe that Nio stock looks well-positioned to rally strongly from its current levels, as the coming year is likely to be positive for the company on several fronts.

A Strong Cash Position

Importantly,  Nio reported cash and equivalents of $7.3 billion as of the end of Q3. Additionally, the company completed an at-the-market stock offering in November 2021, picking up another $2 billion.

With total liquidity of $9.3 billion, Nio is well positioned to invest in growth initiatives next year. As a result, I don’t expect the company to sell anymore shares in the medium term.

Expecting Strong Vehicle Deliveries Through 2022

For Q3, Nio reported that its EV deliveries doubled year-over-year to over 24,400.  Further, in November, the company’s vehicle deliveries increased 105% YOY..

My key point is that Nio’s deliveries have increased at a robust pace even as the stock has struggled recently. I  believe that the growth of the company’s vehicle deliveries can accelerate in 2022 and 2023.

And Nio plans to launch new vehicles, which should spur the YOY growth of its EV deliveries to accelerate. In 2022, Nio intends to launch three new vehicle models based on its Technology Platform 2.0. The company has already announced that it would unveil ET7, a premium, smart electric sedan, in 2022.

Another factor that will boost Nio’s deliveries growth is the automaker’s international expansion. Currently, Nio is shipping relatively small numbers of EVs to Norway. The company, however, is expected to expand into at least  five additional European countries in 2022. And Nio will enter even more European nations further down the road.

It’s worth noting that XPeng (NYSE:XPEV) may open a factory in Europe. I will not be surprised if Nio follows in its footsteps in the coming years, since Nio certainly has enough funds to do so.

Nio’s Margins Are Likely to Increase

In Q3, Nio’s vehicle margin was 18%, up 3.5 percentage points versus the  same period a year earlier. Last quarter, the company’s gross margin expanded 7.4 percentage  points YOY.

For Q4, Nio provided vehicle delivery guidance of 23,500 to 25,500. Since the company’s delivery growth remains robust, its margins are likely to continue to expand.

However, Nio’s marketing and sales expenses will climb in 2022 as it enters multiple countries. As a result, its  operating level loss seems likely to climb, but that  is unlikely to impact investors’ sentiment towards NIO stock.

Also worth noting is that Nio’s R&D expense increased by 102% YOY in Q3. I see that as a positive sign because, amidst the intense competition in the EV  industry, Nio’s investments in innovation will give it an edge.

Tesla (NASDAQ:TSLA)  is a good example of an automaker’s ability to transition from massive cash outflows to positive free cash flows. It achieved operating leverage because its vehicle deliveries constantly increased.

In the coming years, Nio is well- positioned to emulate Tesla by delivering robust EBITDA margins and strong cash flows.

The Bottom Line on NIO Stock

Overall, Nio’s stock seems poised to rally in 2022 after underperforming this year The shares have several positive catalysts, with the company’s upcoming EV launches likely to be the most powerful driver. I would not be surprised if Nio’s shares retest their all-time highs in the next few quarters.

Further, the EV industry will have positive catalysts over the next several years. Even amidst rising competition, Nio is well-positioned to survive and thrive as it invests in innovation.

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


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