Last Tuesday, in my weekly Hypergrowth Investing podcast, I said something pretty controversial. I told folks to buy the dip in NIO (NYSE:NIO) stock.
At the time, the beaten-up Chinese EV stock was a falling knife. It had crashed about 75% over the course of nine months. And the selloff was only accelerating, with investors worrying about soaring metal prices, Covid-19 lockdowns in China and Chinese tech stocks getting delisted.
In the podcast, I scoffed at those issues as short-term headwinds that will soon pass. Meanwhile, I said the valuation on NIO stock was really compelling at $14 and change. So I boldly proclaimed crashing NIO stock a buy.
And since then, NIO stock has soared more than 40% in just five short trading days. Talk about a huge return in a short time frame. And if you want more stock picks like this, check out my other products.
But for now, let’s stick with NIO stock.
The luxury EV startup has soared over the past week. But it’s still more than 60% off all-time highs, and fourth-quarter earnings are due after the markets close this Thursday.
So… will earnings accelerate this breakout in NIO stock? Or will they send it down to new lows?
I think the former. And here are three big reasons why.
China’s EV Market Is on Fire
The first reason we really like NIO stock at $20 ahead of its earnings report is that — contrary to popular belief — China’s EV market is absolutely on fire right now!
In January 2022, more than 370,000 new EVs were registered in China — a jaw-dropping 115% increase from January 2021. That comes on top of 153% growth in new EV registrations in China throughout all of 2021.
Perhaps more impressively, EVs now account for about 13% of all new car sales in China. That’s truly wild considering just five years ago, EVs accounted for only around 2% of total car sales in China.
In other words, the Chinese EV market has exploded over the past five years. And it’s not going to slow anytime soon.
Sure, a new round of Covid-19 lockdowns threatens EV manufacturing capacity in the country. But President Xi said — for the first time ever — that these lockdowns should not and will not hamper economic activity. So, production volumes should be fine.
EV metal prices did soar in the wake of the Russian invasion of Ukraine. But this big pop has moderated in recent weeks. And at current levels, our analysis suggests that the added input cost for EV makers is very small, so costs should remain low.
The Backdrop Priming NIO Stock to Rocket
Meanwhile, China has extended electric vehicle subsidies for two years. But it does plan to phase them out by 2025, so we’re in this “golden middle ground” where subsidies are still around but consumers know they’re going away soon. And that should foster huge demand in China for EVs in 2022-23.
And don’t forget those soaring gas prices. (Could you ever?) They aren’t just soaring here in the States. They’re soaring in China, too, and that’s yet another demand driver for EVs.
Essentially, the backdrop for Chinese EV sales over the next 12 months is highly favorable. Concurrently, all this delisting noise surrounding Chinese stocks has faded. The Chinese government itself promised to support its companies listing on foreign exchanges — a move which all but guarantees a delisting of high-profile China stocks won’t happen anytime soon.
The investment implication? EV stocks — and in particular, Chinese EV stocks — look ready to roar higher.
NIO Is Executing Strongly
The second reason we really like NIO stock is that the company is executing flawlessly against the backdrop of a burgeoning Chinese market.
Just look at the company’s delivery volume trend over the past two years. It’s up and to the right at an incredibly smooth trajectory.
Clearly, NIO has been able to grow with the Chinese EV market ever since the company started delivering cars in 2019.
We suspect this strong execution will persist.
We are particularly excited about the launch of the ET7 this year, as we believe that luxury sedan will shine bright as the most luxurious in the Chinese market over the next 12 months. We’re expecting huge demand for that model.
And at the same time, we’re excited about NIO’s continued expansion into Europe. The company has made it clear over the past few months that they intend to be a global EV brand, like Tesla (NASDAQ:TSLA). Successful European expansion in 2022 will be validation of this vision. And therefore, it could act as a huge upside catalyst for the stock.
Between these two catalysts — and the macroeconomic picture in China and throughout the entire EV sector substantially improving — we believe NIO stock is due for huge returns over the next 12 months.
Indeed, we actually think most EV stocks are due for a big 2022.
The Valuation on NIO Stock Is Compelling
The last and arguably most important reason we’re so bullish on NIO stock ahead of its earnings report is that it is priced for awful news. And any good news on Thursday could spark a big and prolonged rally in the stock.
We believe that NIO will deliver at least 150,000 cars in 2022. Based on its current market cap, then, NIO stock is valued at $225,000 per projected car sold this year.
That’s very cheap for a high-tech luxury EV startup. In that sphere, there are the Big Four “power players” — NIO, Tesla, Lucid (NASDAQ:LCID), and Rivian (NASDAQ:RIVN). All have exceptional technology that allows them to make cars with 300-plus miles of driving range, 500-plus horsepower, and sub-3-second 0-to-60 times. All also have exceptionally sleek designs and finishes on their cars, with very high brand equity and strong customer demand.
In that world of high-tech luxury EV startups, NIO stock is dirt cheap. Tesla is valued at nearly $650,000 per projected car sold in 2022. Rivian is up at $1.5 million per 2022 delivery, while Lucid commands a valuation per 2022 projected delivery of over $3.2 million. NIO is being valued at just $225,000 per car sold.
In other words, if the company caught a similar unit valuation as Tesla, NIO stock would be worth nearly 3X its current price — about $60.
And that’s a conservative way of looking at things because NIO is growing much more quickly than Tesla at the current moment.
So, while NIO may warn about production headwinds in its earnings call on Thursday, we feel that the valuation on NIO stock fully reflects those headwinds. What it doesn’t reflect, however, is the potential for the company to sustain its hypergrowth trajectory in 2022.
The Final Word
We believe 2022 will go down as the year the world went electric.
Dozens of new EV models are launching this year. A handful of them are debuting at sub-$40,000 prices — a price tag that puts them on par with new gas-powered cars. Meanwhile, gas prices are soaring. And EV subsidies are in a “golden middle ground” globally. They’re still around, but consumers know they won’t be in a few years.
This is a breeding ground for enormous EV demand in 2022.
Yet, ahead of this demand surge for electric cars, EV stocks are trading at enormous discounts — creating what we believe is a generational buying opportunity to snag the next titans of the auto industry before they soar hundreds (if not thousands) of percent.
We believe NIO stock is ready to fly higher on any good news.
And it’s also why we own NIO stock in our flagship Innovation Investor portfolio. But it is far from the only EV stock we own. Indeed, NIO stock will be an enormous long-term winner, but it won’t big the biggest one…
Rather, that title is reserved for a tiny, completely unheard-of $3 stock that’s working on secret “forever battery” tech that could entirely reshape this industry.
Less than $3 — and this company could potentially change the world over the next decade.
Needless to say, the upside potential in this tiny stock is enormous — so big that I can’t write its name in this post.
I’ve only shared its details with a small group of folks at the Hudson Theater in Southern California.
But I’d like to give you the same opportunity to learn about the tiny stock at the epicenter of the biggest technological revolution of our lifetimes.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.