Chinese automaker NIO (NIO) is at a crossroads.
While investors were excited at the beginning of the year, this has waned as the company is facing increased challenges including a large drop in ES8 deliveries between Q4 2018 and Q1 2019, as well as a recall of about 5,000 vehicles. While the Chinese economy is slowing, the government also reduced the electric car subsidy by 50%, making NIO vehicles more expensive for customers. And on the financial end, the company was losing money with each sale during the first quarter.
So what's next for NIO stock? UBS analyst Paul Gong is on the sidelines for now, as he reiterates a Neutral rating with a $4.00 price target, which implies nearly 17% upside from current levels.
A major factor impacting Gong’s outlook for NIO is the ES8. The analyst says he cut his “ES8 sales forecast by 35% and gross margin by 9pct for FY19 amid a challenging market, the phasing out of subsidies, and the recent recall on battery safety issues.” The battery recall is a major challenge for NIO — of the ~17,000 cars it has delivered, 5,000 were affected. This is not unheard of for automakers — even the most established brands go through this. But given the immaturity and inexperience of NIO, the hurdle is a bit higher than for the average automaker.
Financially, Gong believes “the expected losses in 2019/20 are likely to trigger several rounds of equity financing to keep NIO solvent given current levels of leverage,” which is not dissimilar to Tesla. As a result of “uncertainties over the level of projected equity dilution,” the stock price remains unstable. While shares have rebounded since hitting bottom in June, Gong still says “uncertainty remains.”
One positive note from Gong is that he is “reasonably constructive on ES6 order intake and delivery,” believing “the model's performance is more balanced and it has a larger target audience than the ES8.” The ES6 has an 84kWh battery option, which can provide a range of over 500km. Gong expects “the ES6 could record 2k+ monthly deliveries in H219, making it the best-selling premium car from a local brand.”
TipRanks suggests optimism with some caution baked into expectations when it comes to Wall Street’s majority perspective on NIO. Out of 6 analysts polled in the last 12 months, 4 rate a Buy on the stock while one maintains Hold and another one suggests Sell. The 12-month average price target stands at $7.90, marking nearly 130% in upside potential from where the stock is currently trading.