Nio’s (NYSE:NIO) fourth-quarter earnings reported after the close Thursday didn’t quite trigger the reaction that its loyal investor base may have been hoping for. The kind of selling NIO stock experienced in the session post its earnings announcement appears to be unjustified.
Those disappointed, for one, should understand that the earnings report pertains to the fourth quarter, which was marred by manufacturing issues. The company had to tweak its production line to accommodate new vehicles due for launch in 2022 and this affected volumes.
Now, don’t pin your hopes on a 180-degree transformation in the first quarter. The company has had issues to contend with in the current quarter that ends later this week. To name a few: the typical weakness seen in China in February, constrained supply chain and the renewed Covid-19 surge in some parts of China.
So, is it time to throw the towel on Nio stock?
Not quite.
Breakeven and Profitability Should Boost NIO Stock
After a string of losses, Nio may be preparing to break even in about two years. Nio’s founder and CEO William Li said on the earnings call that the company is hoping to break even in the fourth quarter of 2023 and reach profitability in 2024 for the full year.
Tesla (NYSE:TSLA) took about 18 years, achieving profitability for a full year in 2021, while Nio is expecting to get to that feat in 10 years.
Nio’s Vehicle Margin Is Still Growing
Nio said its vehicle margin expanded 370 basis points year-over-year to 20.9% in the fourth quarter. This was also better than the previous quarter’s margin of 18%. The margin expansion is commendable because it came despite the supply constraints that are driving up input costs.
Increased revenue per vehicle and the cost savings were brought about by the use of new batteries. These new 75-kilowatt-hour lithium-iron-phosphate and nickel-manganese-cobalt hybrid battery chemistries helped margin expansion, Li said on the earnings call.
Looking forward, Nio targets vehicle margin of 18-20% for 2022.
Not Much Impact From Supply Constraint
Nio clarified on the earnings call that it has capacity to produce 240,000 units annually in 2022. The company also noted that it is working with its battery manufacturing partner Contemporary Amperex Technology (CATL) to add additional production lines for battery cells. The augmented capacity at CATL will provide enough batter capacity to meet production according to the company’s 2022 plan.
However, chips could be a problem, the company hinted. It expects shortages of about 10% of the over 1,000 chips it uses in its vehicles. Nio believes that the rising chip prices have been accounted for in its internal calculations to arrive at margins.
Nio Is on the Cusp of Strong Product Momentum
As promised, the company began delivering the ET7 on Monday, March 28. On the earnings call, Li sounded upbeat on the uptake of the model that is built on the company’s NT2 platform.
Li had this to say: “The test drive to order conversion rate exceeds our expectations which gives us great confidence towards the competitiveness of NT2.”
Nio has two more products in the pipeline that should make their appearances in 2022. One of them is a midsized sedan named ET5, which the Shanghai-headquartered company announced at its Nio Day 2021 held in December. Li described the vehicle as a “perfect combination of Nio’s supercar DNA and the concept of design for autonomous driving.” Deliveries of the model will begin in September.
The third product would be Nio’s first SUV based on the NT2 platform, going by the name ES7. The ES7 will reportedly be launched in April and made available by 2022. The company expects to position this model as a mid-large five-seater SUV.
Bottom Line on Nio Stock
Nio represents a value buy for long-term focused investors. All pointers are toward an extended period of outperformance in terms of revenue and profitability. Near-term supply shocks and cost pressures may serve as minor irritants and not deterrents.
To top it all off: Nio stock is currently grossly undervalued. The stock is trading at a trailing-twelve-month Price/Sales (P/S) ratio of 6.51. This is compared to P/S ratios of 9.31 for XPeng (NYSE:XPEV) and 20.96 for Tesla. The average analysts’ price target for Nio is $44.34, according to data compiled by TipRanks. This promises nearly 110% upside from current levels.
On the date of publication, Shanthi Rexaline 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.
