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NIO Stock: Strong Player in EV Industry
Stock Analysis & Ideas

NIO Stock: Strong Player in EV Industry

I am neutral on NIO (NIO) as the company’s robust growth momentum, outlook and strong support from Wall Street analysts are offset by its $51-billion valuation and lack of profitability.

NIO is a multinational premium EV manufacturing company based in Shanghai, China. The company was founded by William Li in 2014 and debuted its first sports car, the NIO EP9, on the very day the brand was established. (See Analysts’ Top Stocks on TipRanks)

Strengths

NIO has a racing arm known as NIO Formula E Team, which is involved in the FIA Formula E Championship, although it no longer funds the team after selling it to the Shanghai Lisheng Racing.

The company also sees investment from major corporations like Tencent (TCEHY), Sequoia, Temasek, Lenovo, and TPG. NIO is also seeing high demand for its electric cars and its vehicle deliveries have exceeded analysts’ forecasts.

Recent Results

NIO reported mixed results for the third quarter of the Fiscal Year 2021. The company posted a loss of $0.28 per share, which is over twice as large a loss as analysts expected. However, the company’s revenue beat expectations and has seen 116.6% growth year-over-year.

About 88% of NIO’s revenue is generated through the sales of its premium electric cars. The company delivered 24,439 vehicles in the third quarter of 2021, seeing an increase of 102% from the previous year’s quarter.

It delivered 5,418 ES8s, its six-seater and seven-seater flagship smart electric SUVs; 11,272 ES6s, its five-seater high-performance SUVs; and 7,750 EC6s, its five-seater coupe SUVs.

The high number of vehicle deliveries shows the demand for EVs, as well as the company’s excellent capacity to scale up production, despite several supply chain challenges, including the global shortage of semiconductor chips.

The company noted that its vehicle deliveries in October fell by 27.5% year-over-year, which was attributed to manufacturing line upgrades, volatility in the supply chain and preparations for new products.

The company expects vehicle deliveries in the fourth quarter of 2021 to be in the range of 23,500 and 25,500, which would show an increase between 35.4% and 46.9%. It also expects its revenue to improve between 41.2% and 52.2% compared to the fourth quarter of 2020.

Valuation Metrics

NIO’s stock is very difficult to value given that it is still running up steep losses and is unlikely to become profitable in the near term.

That said, it is trading at 6.8x times forward revenues and its EBITDA and net normalized income margins are expected to near the breakeven point in 2022, so the company could very well see EBITDA and possibly even net normalized income profitability in 2023.

Gross margins are expanding as the company scales, improving from 11.5% in 2020 to an expected 19.7% in 2022, so the company could generate significant profitability in the medium to long term.

With revenues expected to grow by 120.3% in 2021 and another 72.2% in 2022, the company clearly enjoys substantial growth momentum and potential.

Wall Street’s Take

From Wall Street analysts, NIO earns a Strong Buy analyst consensus based on eight Buy ratings, one Hold rating, and zero Sell ratings in the past three months. The average NIO price target of $60.67 puts the upside potential at 88.7%.

Summary and Conclusions

NIO is a leading EV technology and manufacturing company that enjoys significant backing from the Chinese government, operates in a high-growth industry, and has a strong competitive positioning thanks to its name brand, scale, and technological prowess. Furthermore, Wall Street is overwhelmingly bullish on the stock, giving it significant upside.

That said, the company is will running up big losses and must continue its strong growth momentum in order to achieve profitability. The valuation is quite rich as well, despite not turning a profit. As a result, investors might want to keep the risks in mind here before initiating a position.

Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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