Nio Can Rally as Much as 30% From Oversold Levels

Nio stock - Nio Can Rally as Much as 30% From Oversold Levels

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From its 52-week high of $55.13, Nio (NYSE:NIO) stock has plunged by almost 75%. The correction occurred due to several headwinds.

First, Chinese companies faced headwinds from local authorities. While technology stocks were primarily impacted, the negative sentiment also translated into broad-based selling of Chinese stocks. Further, Nio faced the challenges related to chip shortages. With the recent surge in Covid-19 cases in China, supply chain issues have been aggravated.

The company also pursued equity dilution to boost its balance sheet reserves for growth. Along with these factors, NIO stock also faces a possible delisting from the U.S. stock exchange. That’s because it failed to file reports required by the Public Company Accounting Oversight Board.

However, Nio has indicated it’s working to comply with these regulations. Additionally, in the worst-case scenario, a delisting is only likely to occur in early 2024.

With NIO stock having tumbled recently, a trading opportunity has been created. It’s also worth noting broad market sentiments are also negative with the prospects of further rate hikes and fears of stagflation. This has accelerated the selling in growth stocks.

In terms of business developments, Nio reported total vehicle deliveries of 5,074 in April 2022. Further, this number has increased by 13.5% year-over-year (YOY).

It’s very likely vehicle deliveries will accelerate once near-term headwinds are navigated. Nio commenced mass deliveries of its ET7, a flagship premium smart electric sedan, in March 2022. Additionally, deliveries of its ET5 is expected to commence in September 2022. These new models are likely to drive growth in this category.

Nio is also expanding its presence in Europe, and plans to be in 25 countries globally by 2025. As the addressable market swells, there is visibility for sustained top-line growth.

With the company reporting cash and equivalents of $8.7 billion as of December 2021, further equity dilution seems unlikely. There is ample cash buffer for global expansion and a manufacturing capacity ramp-up in 2022.

It’s also worth mentioning the company reported a vehicle margin of 20.9% for fourth-quarter 2021. This figure has been improving on a sustained basis. With operating leverage, Nio is positioned to deliver healthy cash flows in the next few years.

The key point I want to make here is the business continues to deliver positives. However, multiple near-term headwinds have depressed NIO stock. I therefore see a good trading opportunity from oversold levels. I would bet on a 20% to 30% rally from current levels around $14.

Of course, a delisting scenario would imply risk for U.S. investors. But that’s not coming anytime soon. With fear being the dominant sentiment, it might be a good time to consider exposure to NIO stock.

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

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.


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