Nio: Is It Time To Buy The Dip With Shares Down 40% From Recent Highs?
The rise of electric vehicles (EV’s) has been a popular trend for growth investors to hop onto over the last several years. This is a very immature market and whether you’re a bull or a bear on the stocks trading in the space, it’s clear that the world is moving away from the traditional internal combustion engine vehicles and into a more renewable future with EV’s and hydrogen powered crafts serving as the main source of transportation. This represents a huge societal shift. And, with that in mind, there is no wonder why investors are excited. There is huge market share at stake. However, the fact of the matter is, EV technology, and potentially more importantly, the infrastructure which would allow the industry to become more widespread, is not yet at the point where the majority of consumers feel comfortable switching from ICE vehicles to electric ones. Yet, that isn’t stopping investors from speculating on the companies that may end up being the winners of the EV revolution and the Chinese company Nio (NIO) certainly appears to be a contender on a global scale.
Luke Lango, a 5-star Nobias analyst who writes for Investor Place has a bullish opinion on NIO shares and recently wrote an article which highlights the stock’s recent double digit pullback as a “golden” buying opportunity. He notes that after first recommending the stock, NIO went on a 45x rally over a 12-month period. Lango says, “stocks don’t go up in straight lines” and after its big rally, Nio “was due for a breather.”
During 2020, NIO shares rose by roughly 1000%. That rally continued into 2021, with shares hitting an all-time high of $66.99 in early February. However, since then, shares have dipped, due primarily to fears surrounding rising interest rates and the negative impact that this has had on many stocks which trade with lofty and speculative valuations.
Today, NIO trades for $39.66, representing a 40.8% sell-off. And, Lango believes that investors who missed the first rally should strongly consider buying NIO into this weakness. He notes that the interest rate fears surrounding growth stocks like NIO are “overblown”.
Lango says, “The 10-Year Treasury yield has, over the past five decades, closely tracked the 3-Month Treasury yield (a proxy for inflation, which the Fed controls with its target interest rate) plus real GDP growth.” He goes on to note that the Federal Reserve as recently said, several times, that it has no plans to increase interest rates for roughly 3 years. And, with that in mind, Lango says, “Let’s do the math: 0% 3-Month yield + 2% normalized real GDP growth = 2% 10-Year Treasury yield.” Today, the U.S. 10-year bond yields 1.727%. To Lango, this implies that the trend of rising rates is nearing its end (in the short-term, at least) and therefore, he says, “Yields will calm down. And soon. Once they do, growth stocks — like NIO — will kick back into gear.”
Lango also believes that the company is fundamentally attractive. He says, “NIO is China’s most dominant premium EV maker, with unrivaled technology and brand equity. On that basis alone, NIO has tremendous long-term revenue and earnings growth potential, since China is the world’s largest auto market and the government there is aggressively supporting EV adoption.”
What’s more, not only is the Chinese market the world’s largest for EVs, but it appears as though the Chinese government has a keen interest in Nio succeeding in helping the country make the ICE to EV transition. Robert Larkin recently published an article on InvestorPlace which highlighted financial aid that the company received from the Chinese government, saying, “NIO stock has received support to keep it competitive in the EV space from a number of programs undertaken by China’s bureaucrats. A 2020 government bailout gave Nio some 7 billion yuan ($1 billion) as the company’s coffers ran low on cash. Other programs, including EV purchase rebates and tax exemptions, have stoked domestic sales.”
In a separate article, Lango touched upon this nationalistic idea as well, saying, “And now, NIO’s biggest competitor — Tesla (TSLA) — is coming under fire in China. As a result, many analysts think that Tesla will have a tough time gaining distribution and selling cars in China. Of course, that’s good news for NIO, since it means that most of the premium EV demand in China will funnel to NIO, not Tesla.”
Regarding the company’s future earnings potential, in the original article linked above, Lango says, “My modeling suggests that NIO is on track to do about $6 in earnings per share by 2030. Based on a 25X forward earnings multiple and a 10% annual discount rate, that implies a 2021 price target for NIO stock of nearly $70.”
Ultimately, Lango says investors need not “overthink” this one. He believes it’s clear that EVs are going to experience massive growth. This is especially the case in the Chinese market, where Nio is the established leader. He expects Nio to sell “millions upon millions of EVs over the next several years” and therefore, things like short-term interest rate fears should not scare bullish investors away from the stock.
Rohail Saleem, another 5-star Nobias analyst who writes for wccftech, recently published an article highlighting Nio’s impressive fourth quarter growth. In the quarter which ended on December 31st, 2020, Nio $1.02b in revenue. He notes that this is the first time in the company’s history that its quarterly revenues surpassed the $1b threshold. That $1.02b Q4 revenue figure represents 130% year-over-year growth. He also said that for the full-year, Nio generated $2.32b in sales.
As far as production goes, Saleem says, “Readers should note that NIO delivered 7,225 EVs in January 2021. As far as February numbers are concerned, the company cumulatively delivered 5,578 EVs, including 1,327 ES8s, 2,216 ES6s, and 2,035 EC6s.” He also notes that Nio ‘is ramping up the capacity of its existing plant – built in collaboration with JAC – to 300K units by the end of 2021.”
Increased capacity should help the company continue to grow its top-line, which is yet another potential bullish catalyst for this company. These are very impressive sales figures, but as Aneta Larkins, a 5-star analyst who writes for Fintech Zoom, notes, the company is not yet profitable.
In her recent article, she said, “NIO isn’t currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. When a company doesn’t make profits, we’d generally expect to see good revenue growth. That’s because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.”
She did note that the company’s triple digit growth is “head and shoulders above most loss-making companies” and therefore, the investment could be an attractive one. Yet, she says “we will like NIO better if we see some big insider buys” and this appears to be the buy-in signal that she’s looking for.
Tom Taulli, a 5-star Nobias analyst who also writes for Investor Place also recently highlighted potential concern for investors, noting that the 7,200 production figure in January fell below the 7,400 figure needed for the company to hit its Q1 growth targets. He says, “One reason for this could be the Lunar New Year holiday, in which a large part of the China essentially shuts down. But there may be another factor at work: the global shortage of semiconductors.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
No one knows how long the chip bottleneck will last, but Taulli says, “But there are indications it could last throughout the year. And since Nio relies on third-party manufacturing, this could put the company at more risk.” Taulli does highlight the company’s increased cash position. It appears that Nio management took advantage of their recent high share prices and raised capital, with the cash on its balance sheet expanding from $3.3b to $6.5b, on a sequential basis, during Q4.
However, as great of a move that this may have been by management, he concludes his piece, saying, “in terms of NIO stock, I actually still think there should be caution. Even with the drop-off, the valuation is far from cheap. Consider that Nio stock is trading at roughly 20 times revenues. This is steep for a capital-intensive company.”
Equities prices are based upon the expectations for future cash flows that a given company can generate and anytime we’re talking about hyper growth companies like Nio, the debate is going to swirl around how long (if ever) the future growth potential of a company will justify the current share price.
Frankly, no one knows. Yet, as you see above, there have been compelling arguments made on either side of the bull/bear aisle be 5-star rated analysts in recent weeks and with that in mind, we couldn’t be surprised to see the stock remain highly volatile.
Nio doesn’t appear to be a holding for investors with a weak stomach; however, with high risk comes potentially high reward, as made clear by the 1000%+ rally that we saw NIO shares experience prior to its recent dip.
Disclosure: Nicholas Ward has no positions in any company listed in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.