Chinese premium electric vehicle maker Nio (NYSE:NIO) has been one of the hottest companies on Wall Street in 2020. NIO stock came into the year around $4. In late November, the stock soared above $55. That’s a whopping 1,275% gain in 11 months — all because electric vehicles are starting to gain significant traction, especially in China, where NIO has turned into a mini-Tesla (NASDAQ:TSLA) of sorts.
But stocks don’t go up in straight lines forever. Not even red-hot EV stocks with enormous long-term upside potential.
Over the past three weeks, NIO stock has slid from $55 to $40, mostly because of escalating geopolitical tensions between the U.S. and China. It also doesn’t help that NIO stock is offering a bunch of new stock at $39 per share.
But this is all just near-term noise.
Ignore it. Buy the dip. NIO stock appears to have put in a technical floor at $40, the fundamental drivers remain exceptionally favorable, and the present valuation leaves ample room for significant long-term upside potential.
So don’t overthink this one. Buy NIO stock on the dip. Hold for the long haul.
Here’s a deeper look.
NIO Stock Has a Technical Floor at $40
It appears that NIO stock has established a strong technical floor around $40.
NIO stock briefly dropped below $40 in early December, before quickly recovering back above $40. The same thing happened again two weeks later. NIO stock dropped below $40. But only a for moment. Then quickly recovered to $40-plus prices.
In other words, recent trading action on NIO stock shows that there is ample demand to buy NIO stock below $40. I don’t expect that demand to waver anytime soon.
It also helps that NIO stock is offering 68 million American Depository Shares at $39 per share. That pricing further cements $40 at a floor for NIO stock. As does the fact that NIO stock’s 50-day moving average sits at $38.
Net net, there is a ton of evidence to suggest that NIO stock will bottom at $40. Couple this technical floor with strong fundamentals and an attractive valuation, and you got a compelling reason to buy the dip in NIO stock.
Fundamental Drivers Remain Strong
Despite recent weakness in NIO stock, the fundamentals underlying the Chinese premium EV maker remain exceptionally favorable.
China’s auto market is rebounding with vigor. Car sales in China have now risen for five straight months, illustrating a robust recovery from the Covid-19 shock earlier in the year. Tons of fiscal stimulus and pent-up consumer demand should help accelerate this recovery in 2021. The China Association of Automobile Manufacturers expects auto sales in the country to rise another 4% in 2021.
Electric vehicles are at the forefront of this recovery, thanks to robust government support, shifting consumer demand and rapidly increasing supply. All of these drivers will remain in place for the foreseeable future. Chinese EV subsidies are going up in 2021. Consumer demand continues to shift in favor of EVs. More and more car companies in China are launching more and more EVs.
China EV sales are expected to surge 40% in 2021. More than that, China is targeting 20% EV penetration by 2025, and 50% by 2035, meaning that this market has several years of 40%-plus growth ahead of it.
In this booming Chinese EV market, NIO is a shining star. The company makes premium e-SUVs that are second-to-none in terms of brand, aesthetic, design, and performance. They are, for all intents purposes, the best EVs in China, save maybe Tesla cars.
That’s why — amid China’s rebounding auto market and sizzling EV market — NIO’s delivery volumes have increased by more than 100% for eight straight months.
This trend should persist for the foreseeable future, too. Plus, NIO is very likely to expand internationally within the next few years, a move which could inject ample enthusiasm into the stock and significantly extend the company’s growth runway.
Overall, the fundamentals underlying NIO stock today remain very positive.
Valuation Leaves Room for Big Upside
Thanks to the recent sell-off, NIO stock is now attractively undervalued relative to the company’s long-term growth potential.
NIO should easily be able to leverage its second-to-none branding, design and technology to become one of the largest players in China’s booming EV market. NIO should also be able to replicate its enormous China success in Europe and North America.
Assuming so, NIO easily projects as a 5%-plus market share player in the global EV market by 2030. That market should easily measure 25-plus million vehicles by then. A 5%-plus share on that implies over a million NIO car deliveries in 2030.
Indeed, I see annual deliveries climbing to over 1.5 million by 2030. Per my modeling, that sets the stage for over $60 billion in revenues, strong profit margins north of 10%, and earnings per share of at least $5.50 (even after factoring in recent dilution).
Based on a 20X forward earnings multiple and an 8% annual discount rate, that implies a 2020 price target for NIO stock of $55.
Bottom Line on NIO Stock
NIO stock is a long-term winner at the epicenter of the EV Revolution. Recent geopolitical noise and share offerings are just near-term noise creating ephemeral weakness in the stock.
What do we do when long-term winners plunge on near-term headwinds?
We buy the dip… once technical support shows up.
NIO stock is no different. Now that technical support has shown up around $40, it’s time to get greedy while the market is being fearful.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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