When stock markets rise, investors ignore political and regulatory risks in China. In the last year, U.S. regulators grew increasingly skeptical of allowing China-based firms to continue listing on the exchange. Since December 2021, worries intensified for Nio (NYSE:NIO). The macro headwinds are overshadowing the relatively attractive valuation for NIO stock.
Nio trades at a better price than its U.S. counterparts, including Lucid Group (NASDAQ:LCID) and Rivian Automotive (NASDAQ:RIVN). In addition, the Chinese electric vehicle (EV) supplier is starting plans to target the mass market.
Are those developments enough to overcome delisting concerns? What if Nio gets delisted? Will it go up? What is the future for Nio stock?
Delisting Worries Hurt NIO Stock
Nio’s potential delisting from the U.S. exchange is not a major concern. Luckin Coffee (OTCMKTS:LKNCY) traded at around $1.50 after its delisting in 2020. Despite falsifying revenue and being delisted, LKNCY recently traded as high as $14. It settled a shareholder class-action claim for $175 million. That removed a major uncertainty, leading to the stock’s sustained rally.
Fortunately, Nio does not have the same accounting irregularities as Luckin Coffee. Nor is it a target of China’s insistence for DiDi Global (NYSE:DIDI) to delist. The Chinese Communist Party wants Didi to delist, citing security fears. Beijing is threatened by the U.S. Securities and Exchange Commission’s requirement to enhance disclosure requirements for Chinese firms. Instead of abiding by the rules, the Chinese government wants DIDI stock to list on the Hong Kong Stock Exchange instead. Now that China no longer needs the U.S. markets to raise capital, Nio’s re-listing on the Asian exchange by early 2024 is a real concern.
To re-assure shareholders, Nio needs to report profitability by the end of this year. In that scenario, investors would gladly continue holding the stock on a de-listing.
Strong January 2022 Deliveries
In January, Nio posted 9,652 vehicle deliveries, up by 33.6% year-over-year. Cumulative deliveries reached 176,722 units. Those are impressive production numbers, especially since the automotive industry is facing a chip shortage. After Nio releases the ET7 on March 28 and the ET5 in September, expect deliveries to accelerate.
The company’s release of Aspen 3.0.5 NO is a milestone in two ways. Nio developed this vehicle exclusively for Norway. It is the first firmware over-the-air update outside of China. Aspen is an operating system that has assisted driving.
Nio also announced an accelerated deployment of its power, sales, and service network. This includes building 836 Power Swap stations, 3,766 Power Chargers, and 3,656 destination chargers as of Jan. 31, 2022.
The chip shortage may disrupt Nio’s deliveries this year. Fortunately, Nio’s latest delivery figures do not suggest this is an ongoing headwind.
Additionally, Nio’s lack of profitability may pressure the stock. If the stock market correction in the technology sector weakens, it would alleviate such fears on Nio stock.
Analysts are bullish on Nio’s stock. The average return is $56.17, according to Tipranks. Readers should not rely on lofty price targets. Almost half of the analysts issuing price targets in the $34 – $70 range have a poor Tipranks star rating of one or lower out of five.
Analysts forecast Nio’s annual earnings growth will top 82.9%. Apply that rate to a 5-year discounted cash flow earnings before interest, taxes, depreciation, and amortization (EBITDA) exit model. Using the following metrics below, Nio would have a fair value of around $32:
|Discount Rate||9.0% – 8.0%||8.50%|
|Terminal EBITDA Multiple||7.2x – 9.2x||8.2x|
|Fair Value||$29.23 – $35.29||$32.21|
Investors should consider applying for a higher discount rate. The U.S. Federal Reserve is raising interest rates, which increases the risk of a recession through slower growth. Investors are less willing to pay a premium for stocks under that scenario.
EV investors may also consider Lucid Group and Rivian. While neither firm is anywhere close to profitable, they have strong products that appeal to customers. More importantly, they are based in the U.S. They do not have de-listing risks.
XPeng (NYSE:XPEV) is a Chinese EV maker whose stock is range-bound. Investors may consider them for their lower volatility. XPeng announced on Feb. 8 that the Shenzhen-Hong Kong stock connect would include its shares.
Li Auto (NASDAQ:LI) is another Chinese EV company. It posted a 128.1% year-over-year increase in Li ONE deliveries in January 2022. Its cumulative deliveries reached 136,356.
Your Takeaway on NIO Stock
Nio’s delisting risk is modest at this time. Investors should care more about the company’s path to profitability. When it gets there this year at the earliest, shareholders may hold the stock as it lists on an Asian exchange. Investors should check that their broker supports holding stocks listed on foreign exchanges.
On the date of publication, Chris Lau 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.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.