Right now, it may seem as if virus-related headwinds are already baked into Nio’s (NYSE:NIO) share price. The market has been well aware for weeks that China’s latest outbreak of Covid-19 is effecting auto production. With this, it is no surprise that news of a sharp drop in vehicle deliveries last month didn’t result in a massive drop for NIO stock. Its shares are actually up 4.6% since the news broke May 1 that April 2022 delivery numbers of 5,074 were down around 50% on a month-over-month basis. But is the impact of Covid-19 disruptions fully priced-in? That’s debatable.
Why? For starters, the outbreak isn’t over. China’s stringent “zero Covid” measures remain in place. Suppliers are trying to restart operations after the temporary shutdowns in March and April. However, they are facing challenges doing so. With this in mind, it is possible that Nio will report underwhelming delivery results for May. In turn, this bodes badly for the automaker’s delivery numbers during this quarter. The analyst community already had modest expectations for delivery growth. Consensus has called for around 31,000 total deliveries during the second quarter (Q2) versus 26,000 deliveries during Q1. In other words, this is a quarter-over-quarter increase of around 19.2%. Yes, it is the second half of 2022, not the first half. That’s top of mind with investors who are bullish on NIO stock.
There is an expectation that the company will see its growth take off again. How? Through both an easing of supply shocks, as well as the launch of new vehicle models. Still, getting production back up to speed within a few months seems hard to achieve. That is not to say that quarterly deliveries in Q3 and Q4 wouldn’t be up from Q1 and Q2. It may mean, though, that the level of increase is far from enough to enable it to live up to expectations. In short, this is bad news for shares.
Granted, investors have already walked back expectations. This has been a factor in its 45% decline year-to-date. We are no longer seeing the type of growth estimates released earlier this year by the sell-side. For example, Credit Suisse (NYSE:CS) has an estimate of 2022 vehicle sales of 150,000. Even so, depending how long the headwinds persist, the market could walk back expectations yet again. In turn, this would put more pressure on this hard-hit stock. If that’s not bad enough, external factors could put even more pressure on shares.
Namely, the pressure would come from rising interest rates. A further jump in interest rates may result in more compression of its valuation. China’s latest Covid-19 outbreak may not be a “game over” moment, but its impact may not yet be fully reflected in the price of NIO stock.
On the date of publication, Thomas Niel 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.
