Nio (NYSE:NIO) stock touched a 52-week low of $1.19 in the fourth quarter of 2019, as the downside was triggered by cash burn and financing concerns. With the company addressing the challenges, however, Nio stock has witnessed positive momentum. Even with the novel coronavirus pandemic stalling growth in China, the stock has trended higher. Currently, Nio trades around $3.60 per share — and I believe that there is more upside potential in the coming quarters.
From a macro-economic perspective, the People’s Bank of China believes that the Chinese economy will swiftly return to potential growth rate. Green shoots are already visible in China’s automobile sector. In fact, China Association of Automobile Manufacturer has reported a 1% growth in automobile sales for April 2020 from 1.98 million vehicles in April 2019.
Moreover, another significant development is that China has extended the new energy vehicle subsidies and tax breaks until fiscal year 2022. In addition, China recently injected 2.7 billion yuan towards battery charging infrastructure. These developments can potentially accelerate the sale of electric vehicles as growth crawls back to potential GDP.
China’s electric vehicles sales are still at 5% of total automobile sales. That said, the government is targeting electrified vehicle sales to increase to 25% by FY2025. Even if China comes close to this target, EV companies have strong growth visibility. And Nio stands to benefit from these developments.
During April 2020, Nio reported 180.7% growth in vehicle sales on a year-on-year basis. That said, this might just be an early indication of the potential reversal sales momentum. If vehicle deliveries remain strong in the coming months, Nio stock is well positioned to trend higher.
Multiple Company Specific Upside Triggers
The biggest relief for Nio has been the agreement with strategic investors to invest 7 billion yuan in Nio China. This cash infusion gives the company ample financial flexibility to invest in the launch of new models, as well as vehicle research and development able to be accelerated.
Another key stock trigger is the company’s focus on cutting costs and improving operational efficiency. The company is expecting to report positive gross margin by Q2 2020. In addition, by the end of the year, the target is to expand gross margin to double digits. If this target is achieved, I see Nio stock trending higher through the year.
A potential challenge, however, is to maintain strong growth in vehicle sales volumes besides cost cutting. In particular, at a time when the automobile sector is crawling back towards recovery. Nonetheless, new vehicle launches by the company can offset this challenge.
The company has launched the all new ES8 in April 2020, which has nearly 188 improvements as compared to the prior model. Furthermore, in September 2020, the company will commence the delivery of EC6 SUV. So, given the cash infusion, Nio can accelerate sales network expansion. And the positive impact will be visible in the coming quarters.
Investors will point to the fact that intense competition in the industry can be a potential headwind. In March 2020, Tesla (NASDAQ:TSLA) sold 10,160 vehicles in China, which is the company’s higher ever monthly sales in the country. Additionally, Ford Motors (NYSE:F) also has ambitious plans for China in the EV segment.
Collectively, competition can impact growth and margins. However, the market is big enough to absorb several players.
My Final Views on Nio Stock
As the Chinese economy gradually crawls back to normalcy, the automobile sector has shown early signs of recovery. And with consumer confidence increasing, I remain optimistic on sustained recovery for the sector.
Also, with ample liquidity and new model launches, Nio is in great position for growth. In addition, the effort to improve operational efficiency is likely to yield results in the form of expanding gross margins. Nio still has a long road to positive free cash flows. However, investors will be positive on Nio stock as long as margins continue to improve.
Nio stock has surged higher by 219% from 52-week lows of $1.19. However, long-term investors can still consider fresh exposure at current levels. I see more juice in the current rally.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
