Having rallied 8% in a week, shares of Chinese electric vehicle maker Nio (NYSE:NIO) look to be finally breaking out. NIO stock has lots of upside right now that’s hard to ignore.
To be fair, NIO stock is still down 13% over the past month and has declined 19% year-to-date. But it does appear that Nio’s share price bottomed at just under $20 on Jan. 28, and has since climbed out of that trough to now trade close to $26.
The rally comes as analysts and financial journalists continue to rerate the stock and single it out as a “buy the dip” opportunity. Barclays bank recently put a $34 price target on Nio’s stock and an “overweight” rating, saying “we believe that the rapid adoption of EVs around the world and booming EV sales have presented China’s EV makers a rare opportunity.”
Despite all the bullish sentiment, it remains to be seen if the latest rally in NIO stock will stick, and if the electric vehicle maker’s share price can regain its former glory. Even with the recent gain, Nio’s share price is still 60% below its 52-week high of $63.06.
Why NIO Stock Has Been Down
NIO stock was impacted over the last nine months by several issues beyond its control. These included the global shortage of semiconductors and microchips that has hurt automakers large and small. Nio has said that more than 1,000 microchips go into each of the vehicles it produces. If even one chip is missing, it can lead to a halt in production. This was the case last year when Nio was forced to stop and start production at its facilities several times.
The company missed on its delivery numbers in August and October due to the chip shortage. However, expectations are that the shortage should ease this year and that global supply chains should improve, which is positive for Nio.
Nio’s share price also got trampled last year as foreign investors stampeded out of Chinese stocks when authorities in Beijing cracked down on publicly traded companies, levying record antitrust fines and forcing some to cancel planned initial public offerings (IPOs) or delist from U.S. exchanges.
While Nio and other electric vehicle makers weren’t singled out for punishment, the actions of China’s politicians and regulators had a chilling effect on Chinese stocks listed in the U.S., with investors big and small hitting the “sell” button. However, it now appears the worst of China’s crackdown may be over. And the government in Beijing seems keen to see its domestic EV companies succeed globally.
Ramping Up Production
With several big headwinds behind it, Nio is ramping up production of its electric vehicles and pushing into new markets outside of China. Nio reported that it delivered 9,652 vehicles in January, up 33.6% year-over-year. The company said that its cumulative deliveries of all its vehicles — the ES8, ES6 and EC6 — have now reached 176,722 units.
Additionally, Nio has announced that it is doubling production at its Chinese automotive plant to 240,000 vehicles a year. The company has begun a push into Europe having established a sales bulkhead in Norway last summer and recently leased 200,000 square feet of office space in San Jose, California, fueling speculation that the company is about to enter the U.S.
Nio is also planning to launch a new ET7 full-size sedan this year, followed by the ET5 compact sedan, and the company has said other new models could debut towards the end of 2022. While the company is not yet profitable, its gross margins are currently at a healthy 20% and should improve as we move through this year.
Nio also continues to have a competitive edge over its domestic and foreign EV rivals with its unique battery swapping service where in customers swap their drained vehicle batteries for fully charged ones without the need to own expensive at home charging stations. This monthly subscription service has proven to be popular with customers, and Nio swapped out its four millionth battery last year.
Buy NIO Stock While It’s on Sale
Nio’s stock is not without risk. Any more punitive actions by China’s government or production problems could torpedo the current rally. Markets also remain volatile and high-flying technology stocks (which EV manufacturers are associated with) are currently out of fashion with suddenly risk averse investors.
All that said, it is difficult to ignore that Nio’s stock is on sale right now and a bargain. The median forecast of the 26 professional analysts who cover Nio is for the stock to reach $55.11 a share within the next 12 months. That’s 119% higher than where the shares are currently sitting. Given the huge potential upside, NIO stock is a buy.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.