Chinese electric vehicle manufacturer Nio (NYSE:NIO) saw its shares swing higher on Tuesday despite poor news. Earlier, Bank of America analysts reduced their price target of NIO stock to $5.90 from $6.50. The banking giant’s research arm maintains a skeptical “neutral” rating on the electric vehicle (EV) maker.
Specifically, BofA Securities analyst Ming Hsun Lee remarked that the research team sees “stronger-than-expected sales for NIO in 2Q24, given 1) the company witnessed decent orders in April-May 2024 as it launched the 2024-version EV models; and 2) up to 33% monthly leasing price cut for its BaaS since late-March boosted sales.” Therefore, on the plus side, the expert anticipates 2024 sales volume to increase by 6% to 193,000 vehicles.
However, the challenge for NIO stock moving forward is operational expenditures. Notably, BofA believes operating expenses (opex) for the current year will run higher than its prior estimate; that is, the opex-to-revenue ratio will march to 41.6% instead of the previous target of 34.8%.
Additionally, Lee expects Nio to incur higher sales and marketing expenses in the second half of the year for its new Onvo brand. As well, research and development expenses can be sticky at 13.7 billion RMB (or about $1.89 billion using current exchange rates).
Nio will disclose its fiscal first-quarter earnings results on June 6, adding criticality to the matter.
NIO Stock Trades in a High-Risk, High-Reward Environment
To be sure, the global EV sector is presently experiencing challenges, casting a dark cloud on NIO stock and others. It’s not that the sector is experiencing an outright deflation. Rather, the market is slowing from its prior tremendous growth rate. Further, economics matters. With combustion-powered vehicles offering a more affordable option for middle-income consumers, this dynamic reduces the addressable market for EVs.
For NIO stock, it must contend with the brutal competitiveness of the Chinese automotive market. Insiders warn that the rivalry will be fierce this year. Over time, many smaller to mid-sized enterprises may be forced to close their doors.
Nevertheless, the opportunity is that by the end of this year, EVs could end up taking 45% of China’s automotive market share. In part, the extreme competitiveness could drive down prices. Further, advanced technologies and economies of scale can help mitigate costs. Lastly, the Chinese government continues to support its burgeoning EV industry, which can improve accessibility.
However, surviving the competitive onslaught will be a challenge. Analysts overall believe in NIO stock, rating it a moderate buy with a $6.69 average price target.
On the date of publication, Josh Enomoto 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.
