Stock Analysis & Ideas

Nio Spikes, Gets a Boost from Morgan Stanley

Story Highlights

Nio has seen a substantial drop over the last 12 months. Is a turnaround in the making? The good news is that several factors are now on Nio’s side.

There’s a new focus on electric cars and electric car makers like Nio (NIO) these days. That’s likely deeply connected to the fact that prices at the gas pump seem less like actual prices and more like a bad practical joke.

Despite some recent issues with China and COVID-19 lockdowns that look like April 2020 all over again, there are some that believe Nio is poised for big growth. Morgan Stanley, for example, recently expressed new faith in the company.

NIO was up 5.1% in premarket trading on Tuesday and kept the gains going into the day’s trading session.

Meanwhile, I think Morgan Stanley may be on to something here. Considering everything going on with Nio right now and the larger macroeconomic picture, I’m going bullish on Nio stock.

The last 12 months for Nio have been mostly downhill. Back in late June 2021, the company hit its high point for the year, over $53. Today, on the cusp of June, that’s slipped to just under $18.

The latest news may serve to help turn things around. Morgan Stanley named Nio to its “tactical idea” list. The posting comes as COVID-19 lockdowns in the Shanghai region are turned around, which should help open production back up. Additionally, Morgan Stanley also looks for new subsidies for electric car buyers to come, which may help fuel sales.

Wall Street’s Take

Turning to Wall Street, Nio has a Strong Buy consensus rating. That’s based on 14 Buys assigned in the past three months. The average Nio price target of $40.66 implies 131.3% upside potential.

Analyst price targets range from a low of $26 per share to a high of $87 per share.

Investor Sentiment is a Bit Mixed

Morgan Stanley feels pretty good about Nio. Based on Nio’s Smart Score on TipRanks—currently an 8 out of 10—it’s not alone. An 8 out of 10 is the lowest rank of “outperform,” which suggests a decent chance that the company will beat the broader market.

Hedge funds, based on the TipRanks 13-F Tracker, are absolutely on board with this notion. Hedge fund involvement with Nio has been on the rise since January of 2021. The most recent quarter proved no exception, as hedge funds added roughly another 3.5 million shares to their collective portfolios.

As for retail investors who hold portfolios on TipRanks, they’re a bit less convinced. TipRanks portfolios holding Nio stock dropped 0.4% in the last seven days and dropped a full 1% in the last 30 days.

Meanwhile, insider trading at Nio is a blank slate. There are no reports of insider trading in either direction coming out of the company. Additionally, Nio’s dividend history is also featureless. There seems to be no plan as yet to begin offering investors a dividend. That’s likely owing to its comparatively new status in the market.

A Smart Tactical Idea Indeed

Morgan Stanley’s assessment of Nio is perhaps a bit too optimistic, depending on how it defines certain terms. It expects Nio shares to “rise in absolute terms over the next 15 days.” Given that it’s already seen some increase just on the strength of being named to the “tactical idea” list in the first place, Morgan Stanley could chalk that up as a win.

Certainly, Morgan Stanley has a point. The lockdowns in Shanghai are relenting. That’s going to not only free up sales but also free up construction. That, in turn, means Nio can address both sides of the demand curve at once. An additional word of subsidies from the Shanghai government valued at 10,000 renminbi—about $1,499.63—can’t hurt.

Meanwhile, beyond that, we have ever-rising prices at the gas pump, which will undoubtedly make electric cars look good to consumers. After all, plugging into a wall socket at night—even at the rising prices therein—is a lot less painful than plugging into a gas pump at over $4 a gallon pretty much everywhere in the country.

Granted, it will hardly be universal, but it certainly does open some possibilities. Drivers in northern states are likely to remain gas drivers, especially given the effects of battery power in cold conditions. Throughout the south, southwest, and western U.S., though, there are much greater possibilities for adoption.

There’s also the key point of a potential recession to consider. Potential new car buyers of any sort may be more likely to hold off on purchases until things start looking better overall. Discretionary purchases are among the first cut in a recession. Unless a current car is on fire or won’t go, a new car falls under discretionary.

Yet an electric car, given the prices at the pump, may be more attractive to consumers. The massive trade-in values on cars right now—especially given the scarcity of other cars—don’t hurt either.

Better yet, word recently emerged that Nio is looking into building a plant in the United States. With Chinese import cars currently subject to a 25% import duty, that makes for quite a bit of incentive to produce in the U.S instead. It also works to simplify the supply chain process, which remains in shambles to this very day.

Concluding Views

Take all those factors together and combine them, and it starts to look like a winning recipe. Just to spice the broth up a bit, Nio also trades well under its lowest price target. The company has shed close to 55% of its value over the last year, which puts it in a pretty sound position. It’s not likely to fall a lot farther. It can’t – unless it closes down completely.

The lack of a dividend, or information about insider trading levels, isn’t helpful. The response from investors is a little unsettling. The exploding rise in hedge fund positions, however, makes up for quite a bit of that.

Right now, Nio is looking pretty sound. With a factory in the U.S. pulling an end-run around supply chain problems, it might be the perfect time to get in on Nio.

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