Nio Stock Has Minimal Downside Risk and Significant Upside Potential

For investors, the decline in Nio (NYSE:NIO) stock might seem puzzling. Even with steady progress from a business perspective, Nio stock has declined by over 50% in the last 12 months.

A close-up shot of the Nio (NIO) ES8 vehicle.

Source: xiaorui /

However, I am bullish on Nio stock for 2022 and beyond. At current levels of $30, the stock looks attractive for accumulation.

There are two important points to note from a price action and market sentiment perspective. Let’s look at these before talking about the business fundamentals.

First, Nio stock rallied from penny stock status in 2020 to highs of around $65 in February 2021. After multi-fold returns, a correction of 50% is not a concern. In particular, when Nio has utilized higher stock price levels to raise funds.

Further, the best time to buy a stock is not when sentiments are bullish. The best time for exposure is when sentiments are bearish and markets seem jittery.

The stock has also corrected with China’s EV industry expected to face the chip shortage in 2022. Estimates suggest that 1 million vehicles will be short of vital components in 2022. However, supply chain concerns are likely to ease in the second half of 2022. I believe that this concern is largely discounted in the stock price.

For Nio stock, this is therefore the best entry point considering a medium- to long-term investment horizon.

23 analysts offering a 12-month price forecast for Nio stock have a median price target of $58.30. This would imply a nearly 100% upside from current levels. On the downside, the most bearish analyst price target is $37.74. This underscores my view that the worst of the correction is over for Nio stock.

Big Growth Plans Will Deliver Stock Upside

Even with chip shortage challenges, Nio reported strong numbers in 2021. Nio delivered 91,429 vehicles during the year, which was higher by 109.1% on a year-on-year basis. It seems very probable that delivery growth numbers will be higher in 2022 and 2023 as compared to last year.

Nio has positioned itself for growth on several fronts. Most importantly, it has the financial resources to execute big plans.

As of September 2021, the company had $7.3 billion in cash and equivalents. With further equity dilution in November 2021, the company’s cash position is $9.3 billion (un-adjusted for cash burn in Q4 2021).

In terms of new model launches, Nio expects to begin delivery of the ET7 in March. It’s a premium electric sedan that will compete with Tesla Model S.

Additionally, Nio has unveiled ET5, which is a mid-size smart-electric sedan. The model will be available for delivery in September and will compete with Tesla Model 3.

An important point to note is that ET5 has a lower pricing and will help Nio reach a wider customer base. Nio’s battery-as-a-service plan will make the down payment even more attractive. The BaaS subscription allows customers to pay a monthly subscription cost to swap depleted batteries with fully charged ones.

Vehicle deliveries will also accelerate as Nio expands in international markets. For 2022, the company targets entry into Germany, the Netherlands, Denmark and Sweden. The company has an ambitious plan to expand to 25 countries by 2025.

On the flip-side, Nio will witness higher marketing and sales cost in 2022. Entry into new markets is the key reason. This can impact EBITDA (earnings before interest, taxation, depreciation and amortization) level profitability. However, I don’t see that as a major risk factor. The markets will focus on expansion, deliveries growth and operating leverage.

Concluding Views

Nio has boosted investments in research and development in Q3 2021. On a year-over-year basis, R&D expenses increased by 101.9% to $185.2 million.

With intensifying competition in the industry, technological edge is a key survival factor. With higher investments in innovation and with a strong financial flexibility, Nio is positioned to survive and grow.

With these factors in consideration, Nio stock looks attractive after a meaningful correction. I would not be surprised if the stock doubles in the next 12 to 18 months.

On the date of publication, Faisal Humayun did not hold (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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