Nio (NYSE:NIO) stock has not been an easy one to recommend. NIO bears have been out in full force. The U.S.-China trade war has provided an overhang. Plunging oil prices added another risk.
But I’ve backed NIO stock for this entire year, and at the moment that call looks like a smart one. Shares have nearly tripled from late December levels and touched a 14-month high this week.
After the rally, some investors might be tempted to take profits. I’m not one of those investors yet.
Yes, the stock has soared (gaining 71% year-to-date), but the underlying story has improved as well. Valuations elsewhere in the electric vehicle industry show the potential of the stock. And the worst-case scenario appears off the table.
In other words, the rally in NIO stock absolutely can continue.
Nio Raises Cash
Coming into 2020, NIO admittedly was a high-reward, high-risk play. The company was sharply unprofitable, competition was intense, and there were concerns about Nio’s balance sheet.
Indeed, the company was even late on payroll in February. Obviously, the impact of the coronavirus pandemic in China was a factor, but skeptics interpreted the delay (of just six days) as a sign that the end was nigh.
Whether or not Nio was on the edge of bankruptcy (and I don’t believe it was quite that dire), the company did need cash. Profitability remains a ways off, and the company wants to expand its footprint of Nio Houses and continue investing behind its high-end brand.
Nio now has the cash to do so. The first step was a $1 billion capital raise from investors that included the Chinese city of Hefei. Nio will have to move its headquarters to that city from Shanghai, but the funding should last for at least several quarters.
That deal put a floor under NIO stock. The company capitalized on the ensuing rally by selling American Depository Shares on the U.S. market. An offering of 72 million ADSs this month raised over $400 million net of fees.
Thanks to these two moves, the balance sheet is fixed. And that takes perhaps the biggest risk off the table.
Nio now can invest behind its business without worry. And that seems unquestionably like good news.
After all, China is recovering from its coronavirus outbreak, and demand for Nio vehicles has quickly bounced back. May unit sales were a record high of 3,436. The figure more than tripled year-over-year.
Obviously, Nio needs to make progress toward profitability as well. But management expects that to be the case. On the first quarter earnings call late last month, chief executive officer William Li said the company expected to hit 5% vehicle gross margin in Q2.
With May deliveries supporting the top-line outlook, that margin improvement should be at hand. And chief financial officer Steven Feng said on that call that vehicle gross margin could reach double-digits by the end of the year.
That means operating losses will continue to narrow this year. That in turn sets up a path to profitability for Nio in the not-too-distant future. Given the size of the electric vehicle market in China, and the continued growth of that country’s middle- and upper classes, there’s a significant runway for growth beyond that point.
Nio Stock Can Keep Rallying
An investor might think that the rally in NIO stock of late incorporates that potential. I don’t believe that to be the case.
After all, by the standards of the industry, NIO actually has underperformed this year. Tesla (NASDAQ:TSLA) has rallied 140% in 2020, and now is worth much more than both Ford (NYSE:F) and General Motors (NYSE:GM). Nikola Motor (NASDAQ:NKLA) is at $75 after agreeing to a so-called SPAC merger at $10 just months ago.
Investors are exceedingly bullish on electric vehicles right now. And there are obvious reasons why. Climate change needs to be addressed. In China, the government has extended subsidies. Simply put, electric vehicles are the future of the industry.
Increasingly, Nio looks like it’s going to be a part of that future. And while the stock is up 71% this year, it’s only added about $4 billion in market value.
Given a de-risked story and the potential in the Chinese EV market, that’s hardly enough to suggest the stock is suddenly overvalued. In fact, in a market where Tesla is worth $185 billion and Nikola over $30 billion, $4 billion in gains seems more like not enough than too much.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.