Nio (NYSE:NIO) made an emphatic statement after posting record deliveries during the first quarter. Moreover, NIO stock is slowly picking back up, having undergone immense weakness over several months. However, the stock trades almost 65% lower than its 52-week high price of $55.13, suggesting the market is still undercutting its potential. Despite the challenging macro-economic outlook, though, NIO stock remains a buy over the long term.
Overall, it has been a tough few months for Chinese businesses due to a confluence of factors. For example, Shenzhen — one of the most populated cities and major manufacturing hubs in China — suffered the worst outbreak of the novel coronavirus since 2020 recently. Also, you have the Russian invasion of Ukraine, where China is firmly behind its ally in Russia despite the regulatory challenges its companies face in the U.S. To make matters worse, diversified tech giant Tencent Holdings (OTCMKTS:TCEHY) faces possible fines pertaining to anti-money laundering violations.
Nevertheless, the short-term choppiness in Nio shouldn’t deter investors from going long on the company. Thus, let’s take a closer look at why NIO stock continues to be a buy.
Back Where It Belongs
Nio ended last year with a bang, doubling its total revenue year-over-year (YOY) by 122% to $5.67 billion. In the fourth quarter alone, it notched up $1.55 billion in revenues, mainly attributable to the robust domestic demand. However, due to the Chinese New Year, Nio and its peers witnessed a slowdown in deliveries this year’s first couple of months. Nevertheless, the EV giant bounced back in March, delivering a record 9,985 vehicles during the month. The vast majority of deliveries were ES6s, followed by the EC6 and ES8. Additionally, it commenced deliveries of its new passenger sedan, the ET7.
As we advance, we are likely to see a shift in the company sales mix with the launch of the ET7, which will see a major ramp-up in production and deliveries this year. Overall, Nio ended the first quarter delivering 25,768 cars, up an incredible 28.5% YOY. And its first-quarter results ended up at the higher end of the delivery guidance numbers of 25,000 to 26,000 cars. Furthermore, total deliveries as of March were at 192,838 — a mind-boggling number considering how fast the number has grown in the past few years.
Recapping The Fourth Quarter Results
Collectively, Nio ended another quarter with aplomb. Despite the headwinds during the fourth quarter, the automaker saw a 49.3% increase in sales. In turn, it delivered 25,034 vehicles during the quarter, representing a 44.3% bump from the same quarter last year.
Furthermore, the company accomplished a healthy 20.9% vehicle margin. However, considering the massive research and development (R&D) costs and other operational expenses, that margin is likely to come down this year.
Nio’s R&D expenses shot up 84.6% to $720.6 million last year due to higher spending on the development of new products. On that note, it expects its R&D costs to double in 2022 and a sizeable increase in headcount. If it can execute its plans effectively, it will diversify its revenue mix and put it on track to become a mass-market EV player.
Perhaps more importantly, if Nio’s plans come to fruition, it can break even during the fourth quarter of 2023 and possibly have its first full year of profitability in 2024. Naturally, if we progress in the company’s profitability in the upcoming quarters, the stock price can catapult to new highs. Furthermore, at the end of Q4, Nio reported a whopping $8.7 billion in cash and cash equivalents. The figure represents a spectacular 40% increase from 2020.
What Do With NIO Stock
All in all, there’s plenty to be optimistic about over NIO stock. The automaker has set some ambitious goals, and if it hits them, its stock could jump tremendously. However, it won’t take much for the market to go awry. Hence, the stock should remain volatile in the interim.
The company is seeing a strong recovery in delivery volumes after the Chinese holidays, and the launch of the ET7 and ET5 sedans later this year could be a major catalyst. The pullback in NIO has created an attractive entry point for investors looking to open up a position in the stock. In fact, according to 29 analysts, NIO stock has a 12-month price forecast of $32.98 per share. This is 67% upside from current levels, so investors should keep a close watch on NIO stock moving forward.
On the date of publication, Muslim Farooque 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.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
