It has been a rough ride for shares of Chinese premium electric vehicle maker NIO (NYSE:NIO) (no pun intended). At one point in time, NIO was being hyped as the Tesla (NASDAQ:TSLA) of China. The company was featured on a 60 Minutes special which shone a favorable light on China’s electric vehicle trends, and a particularly favorable light on NIO’s competitive positioning in that market. Investors got bullish and Nio stock popped from below $6 in late 2018, to above $10 by March 2019.
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Then reality hit. Specifically, China’s economy continued to slow amid escalating U.S.-China trade tensions. As China’s economy slowed, so did auto demand. The slowdown in the auto market hit the red-hot electric vehicle space, which had previously been a major growth vertical. By mid-2019, EV sales in China were dropping.
Against this unfavorable backdrop, NIO struggled to sell its premium EVs. Delivery volumes dropped big. So did revenues. Margins didn’t make any progress. Losses piled up. NIO stock tanked from above $10 in March 2019 to just over $1 in early November 2019.
But for the first time this year, there’s reason to be cautiously optimistic on Nio stock. Why? A variety of reasons, the sum of which paint a favorable picture of where NIO stock could go over the next few quarters.
I think it’s time to buy the dip in Nio stock. Sure, this stock is still very risky, but there’s a ton of reward potential, too, and with all of the important trends now moving in NIO’s favor, it increasingly appears that the potential reward here outweighs the potential risk.
Most Trends Are Moving in Favor of NIO Stock
The big idea behind the bull thesis on Nio stock today is that all of the important trends surrounding NIO are finally moving in favor of the company.
First, China’s economy is rebounding. Since January 2018, China’s economy has been stuck in a secular slowdown. But over the past few months, U.S.-China trade tensions have eased, and China’s economy has begun to show signs of life: consumer sales are stabilizing, Purchasers Manager Index readings are rebounding, and OECD leading indicators for China are improving.
The implication? The macro environment for NIO is going from working against Nio stock, to working for Nio stock.
Second, Chinese stocks are coming back into favor. From January 2018 to early August 2019, the iShares MSCI China A ETF (NYSEARCA:CNYA) shed nearly 30%. Since then, CNYA has risen more than 10%. As a result, Chinese stocks are coming back into favor, so the macro sentiment headwind which hurt NIO stock over the past two years is turning into a sentiment tailwind.
Third, NIO’s delivery trends are reversing course. NIO has had trouble selling cars in a slowing Chinese economy. First quarter 2019 delivery volumes came in well below their fourth quarter 2018 total. Second quarter deliveries were less than first quarter deliveries. But, third quarter deliveries came in well above Q2 deliveries, and the most recent October delivery number was the best number seen this year. NIO is finally starting to ramp up delivery volumes behind healthy ES6 demand.
Big picture: Nio stock was hit by a plethora of headwinds over the past few quarters. For the most part, those headwinds are now tailwinds. Naturally, this means that the worst may be over for NIO stock.
Shares Could Explode Higher
If things do work out for NIO — that is, if this company can successfully craft an enduring niche for itself as the de facto premium EV maker in China — then NIO stock could explode higher from current levels should the tide turn.
The logic is simple. China is the world’s largest auto market. Electric vehicle penetration in China is relatively high, and going higher thanks to legislation promoting wider adoption of EVs and technological advances pushing down the prices. Thus, China’s EV market one day will be the largest EV market in the world. If NIO controls just a small slice of that market (the premium end) at favorable price points and margins, then NIO could one day report sizable profits.
Here are the numbers: China’s passenger car market measures just under 25 million vehicles sold per year. It’s growing at a steady 2%-plus annual clip. This growth should persist thanks to urbanization trends across China. China’s auto market should measure 30 million vehicles by 2030. Of those approximately 25 million vehicles sold in 2018, a little over a million were EVs, implying an EV penetration of 4-5%. Both of those figures have grown at an exponential rate, and will continue to grow as EV adoption trends gain momentum.
By 2030, China could easily be looking at a 25% EV penetration rate in a 30 million car market, implying 7.5 million annual EV unit sales. In 2019, NIO projects to control about 1.5% of the EV market. That rate should grow over time as NIO launches new cars and gains more brand relevance. Assuming even just a 2% share by 2030, that implies 150,000 annual deliveries.
Further assuming an average sales price point of $50,000, auto gross margins of 20%, and an industry average 10% opex rate, NIO could very realistically hit 60 cents in earnings per share by 2030. Based on market-average 16-times forward earnings multiple and 10% discount rate, that equates to a potential 2019 price target for NIO stock of nearly $4.
Bottom Line on Nio Stock
NIO stock has been a big loser for a long time. But the fundamentals are improving, as are the optics. As such, it feels like the tide is turning. If the tide does turn, the NIO stock price has a somewhat realistic opportunity to double from current levels.
As of this writing, Luke Lango was long NIO and TSLA.
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