Chinese EV manufacturer Nio Inc. (NYSE:NIO), the company probably best-known for offering to swap out empty batteries on its electric cars for new, full charged batteries, in three minutes flat, is gearing up to report earnings for Q3 2023 on Tuesday, Analysts’ consensus estimates point to an expected loss of about a $0.23 per share loss on quarterly sales of $2.7 billion.
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In a new report previewing next week’s earnings report, Deutsche Bank analyst Edison Yu is urging investors to “buy” shares of this Chinese EV company that’s lost 40% of its market capitalization over the last 52 weeks. Hearing that, investors may wonder what has Yu feeling optimistic that Nio is due for a turnaround? And he is optimistic, predicting Nio stock will gain more than 53% over the next 12 months to reach a share price of $11.
Let’s start with deliveries.
Nio has already confirmed that it hit at least the lower end of its guidance for EVs delivered in Q3, selling 55,432 units in the quarter, which is a good start. What’s more, as volumes grow, Yu has a hunch gross profit margins will grow as well. Yu forecasts 7 to 8 percentage points margin improvement over Q2. And seeing as in Q2, Nio scored all of one percentage point of gross margin, that could equate to a 7x or 8x improvement in profits — which one imagines might grab investors’ attention.
Still, don’t get too excited.
Yu does believe that selling, general, and administrative expenses have grown since Q2 as well. The question next week will be how much SG&A grew, and whether it grew slower than gross profits, so as to result in any improvement on the bottom line. For his part, Yu is forecasting a 2.30 RMB per share loss for the quarter, which works out to $0.32 — a result that’s actually worse than the consensus forecast.
Nor is this the only bad news in Yu’s “buy” recommendation for Nio. “Competition is only getting fiercer” in the Chinese EV market, warns the analyst, and “sentiment is very negative.” Yu thinks Nio may be struggling to grow sales as fast as investors would like to see, moreover, predicting that delivery volumes in Q4 may fall into the “mid-high 40,000 range” — so a sequential decline of anywhere from 11% to 18%. And if volumes fall short of targets, Yu worries this could cause Nio to miss targets for both gross and profit margins as well.
Furthermore, Yu adds that he’s ratcheting back his Nio deliveries forecasts before the bad news arrives, and now sees 2023 deliveries of inly 157,000 units, and 2024 deliveries of 200,000 units — cuts of 10% and 26%, respectively.
“Encouragingly,” the analyst summed up, “the company appears to be making big changes especially to sales structure and expense management/ROI. This should bear fruit in the coming quarters while material improvement in volume trajectory may take more time.”
Are other analysts in agreement? Most are. 4 Buys and 1 Hold have been issued in the last three months. So, the message is clear: NIO is a Strong Buy. Given the $14.38 average price target, shares could surge ~101% in the next year. (See NIO stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
