There’s a simple, but important, question to ask when it comes to Nio (NYSE:NIO) stock. What would the biggest electric vehicle manufacturer in China be worth?
I’m willing to bet it’s more than $17 billion, Nio’s current market capitalization. In fact, I’m willing to bet it’s a lot more.
To be sure, Nio actually has to get to the point of being China’s biggest EV maker — or at least its best. It has a lot of work to do, and no shortage of rivals in its way. As Bloomberg reported last year, there are nearly 500 registered electric vehicle manufacturers in the country. American companies are targeting the market as well.
But Nio has a real chance. Its high-end sport utility vehicles appear to be the best China has to offer. As I pointed out earlier this month, Chinese automakers have made enormous strides in quality over the past two decades.
Nio’s second quarter earnings earlier this month show the company’s growth potential. An innovative move only adds to the potential.
Electric vehicles are the future. Nio will be a big part of that future. And that suggests that even after a 318% rally so far in 2020, NIO stock has more room to run.
A Strong Earnings Report
Somewhat surprisingly, investors didn’t react well to Nio’s Q2 release. NIO stock sold off 8.6% that day.
But the stock has recaptured those losses — and from here, that bounce makes sense. After all, unit deliveries nearly tripled year-over-year.
Investors knew that going in, as Nio releases monthly sales figures. In July, however, the news is even better, as deliveries more than quadrupled.
The rest of the news looks just as positive. Vehicle margin (ie, gross margin on vehicle sales), which had been negative, improved to nearly 10%. Overall gross margin came in at 8.4%.
Certainly, neither figure sounds like much. But they represent significant improvements from the year-prior quarter, when vehicle margin was negative 24%. And as Nio continues to sell more vehicles, it will make more profit through unit as it benefits from scale.
Adjusted operating loss came down by two-thirds. That, too, represents real progress as Nio still is investing in its growth.
Most importantly, Nio has firmed up its balance sheet. Operating cash flow in the quarter was positive for the first time. The company also received the first two installments of a $1 billion funding deal.
This is a company that bears were arguing was headed for bankruptcy. It closed the second quarter with $1.6 billion in cash. That’s plenty of money to invest heavily behind a lucrative growth opportunity, let alone avoid a restructuring.
BaaS Another Catalyst for Nio Stock
All told, Q2 shows a company making quick progress toward becoming a profitable EV leader in China. A more recent development suggests an innovative company as well.
Last week, Nio announced what it calls its “BaaS” — battery as a service — platform. Essentially, customers can choose to pay a monthly subscription fee for a battery pack, and in return receive a reduction of the original price for the vehicle.
This is a big deal. Battery swaps minimize the need for sometimes-slow charging, particularly in China’s congested cities. It also makes insurance easier, as battery flaws or shorter-than-expected life can lead to big losses.
BaaS is a potential game-changer for Nio and for Nio stock. BaaS makes the company’s vehicles more attractive to customers. It makes ownership easier. And it adds a source of valuable recurring revenue.
More broadly, it only adds to the sense that Nio is the premier EV manufacturer in its market. Between battery swap and the well-known Nio Houses, there isn’t a company (yes, out of those nearly 500 rivals) that offers such a premium experience.
That experience already has led Nio to deliver impressive unit growth. Margin improvements are starting to follow. As long as Nio stays on its current trajectory, Nio stock should keep gaining. And BaaS is just one reason why the current trajectory should hold.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.