NIO Stock Forecast

NIO Inc. [NYSE: NIO] is a Chinese multinational automobile manufacturer which designs, develops, manufactures, and sells fully electric, battery-powered vehicles in Mainland China, and Hong Kong among other countries.

NIO produces five, six, and seven-seater electric SUVs, as well as smart electric sedans. The company also offers comprehensive value-added services, and a convenient and innovative suite of charging solutions to its customers. These solutions include:

• home charging solution called Power Home;
• Power Swap, its innovative battery swapping service;
• Power Mobile, its mobile charging service through charging trucks; and
• Power Express, the company’s 24-hour on-demand pick-up and drop-off charging service. 

The company was formerly known as NextEV Inc. and changed its name to NIO Inc. in July 2017. NIO’s Chinese name is Weilai, which means Blue Sky Coming. The company was founded in 2014, but only started selling cars in China in 2018.  NIO Inc. is headquartered in Shanghai in the People’s Republic of China.

The Bull Case for NIO

The turnaround in NIO’s fortune in just over a year could rank amongst one of the top success stories of our time. 

The Chinese electric vehicle (EV) maker, in April 2020, was on the verge of bankruptcy, which forced it to accept a 7-billion-yuan ($1 billion) investment from entities led by a municipal government in China.

As part of the deal, it had to transfer core assets and businesses in China into a new company and hand over 24.1% of that entity to the new investors. Since then, there has been a stunning reversal in fortune, as surging vehicle sales has made NIO one of the largest car companies in the world with a market capitalization of around $55 billion.

Of course, this phoenix-like rise has not gone unnoticed amongst investors and consumers, making them wonder if this is another Tesla [TSLA] in the making. The million-dollar question then is whether NIO has what it takes to sustain what it has managed to attain so far.  

NIO is one of the new kids on the block in China’s rapidly growing premium electric vehicle market. The EV-maker started selling cars only in 2018, and delivered a little over 44,000 vehicles in 2020. It’s early days yet for NIO and the Chinese company is just a spring chicken in front of Tesla which delivered 500,000 cars last year.

However, the company is keenly following in the footsteps of Tesla, trying to position itself as a ‘premium’ brand in the EV market. However, unlike Tesla, NIO does not manufacture its own vehicles, choosing to outsource production to state-owned company Jianghuai Automobile Group Co.

Why are investors so fired up about NIO?

The electric vehicle (EV) market has been generating a lot of buzz these days, which explains why there’s so much excitement about a young and fast-growing EV company like NIO.  The company is rapidly growing its market share in China, which happens to be the world’s largest market for electric vehicles, accounting for approximately 50% of all the world’s electric cars.

China has outlined plans to get fossil-fueled cars off the road by 2035. By then, all new vehicles sold in China must be powered by ‘new-energy’. Half of them should be electric, fuel cell, or plug-in-hybrid, while the remaining 50% would have to be hybrid vehicles. The Chinese government, over the years, has been offering generous subsidies to encourage people to buy electric vehicles since 2009.

This is the reason NIO’s sales have quadrupled year over year, while EV sales in China have more than tripled, accounting for around 5% of all new car sales. The subsidies, though, are now being slowly phased out, but they have played a very critical role in jump-starting the EV industry in China.

The China Association of Automobile Manufacturers believes the sale of electric vehicles in China could jump as much as 40% in 2021 to 1.8 million. That’s more than three times the 500,000 vehicles Tesla sold in 2020.

Of course, NIO is not the only one vying to take the largest chunk from such an enticing pie. Big names of the automobile industry, including VW, Toyota (TM) and Tesla, are liberally loosening their purse strings on the production of electric vehicles in China.

And with these titans, there are also more than 400 registered local manufacturers, including US-listed automakers BYD and XPeng [XPEV] (backed by Chinese e-commerce giant Alibaba [BABA]), striving to capture a large chunk of the EV industry in China.

What sets NIO apart from other EV makers

NIO is trying to offer a solution to an EV’s primary pain point—charging. An electric car can take hours to fully charge, which could be a real drag on your time. 

NIO has come up with a clever solution to counter the lengthy charging time of electric vehicles. It has designed battery packs that can be easily removed from under the vehicle.

It provides real peace of mind to drivers who can easily swap batteries while driving long distances. It eases ‘range anxiety’, as drivers no longer have to fear being stranded in the middle of the road because of a discharged battery.

NIO plans to build 500 battery swap stations throughout China by the end of 2021. The swap technology has been cleverly paired with a BaaS (‘battery-as-a-service’) subscription model, where vehicle owners can lease a battery for a monthly fee.

This model offers a lot of benefits both, to the company as well as the customers. It serves as a regular mode of cash flow for the company while at the same time ensuring that the customers need not worry about the depleting quality of their batteries over a period of time.

What’s the revenue generation like for NIO?

NIO only started selling cars in China in 2018. The company has been a startling success as it hardly had any revenue in 2018, but generated more than $1.1 billion in revenue in just a year.

For such a young company, NIO has increased its sales surprisingly quickly. NIO, in the first quarter of 2021, generated $1.22 billion in revenues, representing an increase of 481.8% from the first quarter of 2020 and an increase of 20.2% from the fourth quarter of 2020.  

Net losses were $68.8 million in the first quarter of 2021, representing a decrease of 73.3% from the first quarter of 2020 and a decrease of 67.5% from the fourth quarter of 2020. 

NIO’s vehicle deliveries came in at 20,060 for the quarter. The company had delivered 3, 838 vehicles in the same period last year, while it delivered 17,353 vehicles in the fourth quarter of 2020. 

NIO expects to deliver between 21,000 and 22,000 vehicles in the second quarter of 2021. It also expects total revenues for the second quarter to be between $1.2 billion to $1.3 billion, representing a year-over-year (YOY) increase of between 119.0% and 129%.

NIO Beating Expectations

NIO continues to perform beyond expectations in China’s fragmented EV market. The EV maker continues to excel amidst the chip shortage plaguing the overall automotive industry.

Deliveries and production are going from strength to strength, and the Chinese company’s financial picture is improving dramatically at scale. The company is taking a lot of important initiatives to expand its market share in China as well as across the globe.

NIO is all set to enter the Norwegian market, and is also keenly focusing on making improvements to its  BaaS/swapping stations and services. NIO is also in the process of expanding its production capacity, stating that it is planning to build a new plant in Xinqiao Industrial Park in Hefei.

While its supply chain faces significant challenges as a result of the global semiconductor shortage, long-term prospects of the company look extremely bright.

The Bear Case for NIO

Demand for NIO’s products remains strong, but the main risk for NIO at this juncture is that its supply chain faces significant challenges owing to the ongoing global shortage of semiconductors.

In fact, global semiconductor shortage has remained “the key constraint” for NIO, and is expected to hold NIO’s production down for a while longer. The company has been forced to continue with a 7,500-unit production cap caused by the chip shortage.

Production has not been able to resume at max 10,000 units per month, which is impacting the level of deliveries, despite strong demand still in play.

In late March, the company halted production for five days at one of its plants in Hefei province due to the chip shortage caused by a fire that took place at a Japanese chip factory owned by Renesas Electronics Corp. This has further exacerbated the crisis, reducing some auto suppliers’ access to chips even further for the time being.

Chairman William Li of NIO said that the impact of the fire would hit the automobile supply chain in mid-May. However, Li noted that the industry is expecting the supplies to start showing improvement by third quarter.

Also, NIO is yet to turn profitable. NIO will be needing a lot capital for innovation and expansion to maintain its position as China’s leading startup brand. NIO has unveiled a concept autonomous car, EVE, and further expansion in Europe and North American will be capital-intensive.

The Chinese EV manufacturer had to raise billions of dollars in cash by issuing debt and selling new shares to fund its growth over the last year. And while market demand for NIO has recovered well, and pace of new orders continue to increase, NIO will have to fully utilize every dollar it can get to successfully take on larger rivals with big balance sheets, strong brand awareness and years of industry experience. 

Moreover, NIO may not be immune to broader EV stock movement. For example, Tesla has been under selling pressure recently, and NIO’s stock price has followed suit. The reason for it could be that investors have shown an inclination to buy and sell Tesla and other electric vehicle stocks as a group in recent weeks. 

All in all, there may be short-term jitters, but the overall longer-term story for NIO remains very optimistic.

NIO Stock Price Forecast

Analysts’ share price target for NIO range from a low of $30.50 to a high of $80.30.

On average, they anticipate NIO’s share price to reach $50.78 in the next year. This suggests a possible upside of around 50% from the stock’s current price.                                                                                                                                                                                

Is NIO Stock A Buy?

Electrification of transportation is the future, with industry research showing the sale of EVs to reach around 55 million by 2040.

Researches also reveal that China, the world’s largest automotive market, will account for about 13 million EV sales in 2030, and 18 million by 2040. 

The data shows a lot of promising growth prospects for premium EV makers such as NIO. The Chinese company is one of the fastest growing EV manufacturers in China, having delivered 20,060 vehicles in the first quarter of 2021, representing 423% year-over-year growth.

The company currently offers three electric SUV models, even as it plans to start production of its highly anticipated ET7 luxury sedan next year.

NIO grabbed the largest market share in China’s all-electric SUV market in April (23%), higher than its U.S.-based rival Tesla Inc (17%), according to China Automotive Technology and Research Center data.

However, NIO faces stiff competition at home and abroad. Profitability is an issue, but the company is making good progress on that front. NIO’s Q1 net loss totaled $68.8 million, a decrease of 67.5% from the previous quarter, and 73.3% compared to the first quarter of 2020. 

Let’s have a look at the prospects of NIO and whether it should be on your watchlist.

Deliveries and Financials

Deliveries for April slowed down a bit to 7,102 units, though it pushed cumulative deliveries past the 100,000 milestones.

Overall, deliveries of vehicles were 20,060 in the first quarter of 2021, including 4,516 ES8s, 8,088 ES6s and 7,456 EC6s, representing an increase of 422.7% from the first quarter of 2020 and an increase of 15.6% from the fourth quarter of 2020.

NIO is pretty optimistic about the second quarter despite the negative impact of the chip shortage. Guidance provided during Q1 points to deliveries between 21,000 to 22,000 units in the second-quarter.

Q1’s financials were solid, with NIO generating $1.218.3 billion in the first quarter of 2021, representing an increase of 481.8% from the first quarter of 2020 and an increase of 20.2% from the fourth quarter of 2020.

NIO lost just $0.04 per share for the quarter, and the company could turn profitable as early as Q4 if chip shortages ease slightly and high seasonal demand is exhibited.

Major developments

While NIO sees that its “supply chain is still facing significant challenges due to the semiconductor shortage,” there are, nevertheless, important developments underway that could play an important part in NIO’s future success. 

NIO first talked about its intention to expand into European markets during Q4’s earnings call, and recently released a more detailed update about Norway being the first stop in NIO’s global plans. The company is following its rival XPeng to the Norwegian market, while potential entry is on the cards for more European countries as well as North America sometime in the next few years.

NIO Power and NIO Services are two other ways that NIO is developing infrastructure and increasing customer utility. NIO has unveiled the ‘Power North’ plan, under which “it will deploy a total of 100 Power Swap stations, 120 Power Mobiles, 500 Power Charger stations with over 2,000 Power Chargers, and over 10,000 destination chargers in eight provinces and autonomous regions” by 2024. More Power Swap stations would lead to more customers opting for BaaS, which means a steady cash stream for the company.

NIO is a premium vehicle maker, catering to the premium market segment, but the discount offered through BaaS significantly brings down the price, which allows it to compete on price with larger rivals like Tesla.  For example, with 70kWh BaaS, a customer is eligible for RMB70,000 discount with a monthly RMB980 cost, while for100kWh BaaS, the customer gets a RMB128,000 discount with a monthly cost of RMB1,480. 

BaaS subscriptions accounted for over half of new orders in Q1, and it is expected that the value provided by BaaS is likely to serve as a major tailwind for the company.  Apart from that, buyers of EV also stand to benefit from government subsidies and tax exemption.

Moreover, NIO also offers a lot of additional services to entice customers, including access to lifetime free warranty and roadside assistance (no time/mileage limits), door-to-door valet service assistance, and lifetime free in-car connectivity up to 8GB cellular data per month among other services.

The company, in order to further solidify its presence in China, is building a new plant in Xinqiao Industrial Park in Hefei “as part of NeoPark, a 16,950-acre industry park that will become home to multiple companies, 10,000 R&D workers, 40,000 technical workers, and a total capacity among all occupants of 1 million vehicles annually”.

Overall

NIO’s deliveries were a bit down in the month of April owing to chip shortage. In fact, shortage of chips remains a major headwind not only for NIO, but the overall automotive industry.  Additionally, uncertainty about a definite time period for the crisis to pass over could cloud revenue and delivery forecasts for the full year.

However, despite the ripples being caused by the chip shortage, NIO is increasingly showing signs of strengthening its financial position. Margins have increased on some higher ASPs, while net loss has diminished to a considerable extent.

The company plans to expand in Europe with Norway being its first stoppage. It said it will initially sell its flagship ES8 electric SUV in Norway, followed by the new ET7 sedan, after it goes into production early next year. NIO also plans to establish its battery swap stations in Norway by the end of 2022. 

Increased offerings in Power and Services generates brand loyalty by offering more value to customers, and the BaaS subscription model helps generate consistent monthly revenue streams for the company.

Capacity expansion also will aid long-term delivery growth with the new plant planned at NeoPark. To sum it up, NIO stock isn’t cheap. Shares are currently trading in the mid-$30s, up almost up 800% in the last 12 months, putting the company’s market capitalization at about $55 billion.

There may be short-term headwinds, but NIO’s impressive long-term potential sets shares up for a positive long-term trajectory as the growth of EV adoption plays out.

NIO Investment Thesis Conclusion

The demand for clean energy vehicles is expected to soar in the years and decades to come with the number of electric passenger cars expected to reach 200 million in 2030. Established carmakers around the world are quickly developing technologies to adapt to a new world in which electricity replaces gasoline and diesel.

What makes NIO extra fascinating is that it’s located in China, the world’s largest auto market, and also the largest market for EVs.  By 2035, The Society of Automotive Engineers of China believes that half of all auto sales will be some form of alternative energy (95% of which will be EVs).

This makes China one of the most rewarding markets in the world for EV manufacturers. The competition, as such, is fierce with both, foreign and domestic automakers, competing for a piece of the lucrative pie.

However, what makes NIO different from other EV manufacturers is that it has put in place a very innovative strategy that is going to benefit both the company and its customers. Last year it introduced a breakthrough battery-as-a-service program (BaaS), where NIO users can purchase a car without the actual battery, making EVs more price competitive.

The company offers its EV buyers battery replacement and upgrades for a monthly fee.  BaaS also provides a solution for issues such as battery degradation, upgradability and low resale value.

NIO Vehicle Deliveries

NIO generates maximum revenue through the sale of vehicles. The company currently delivers three types of models: the ES8, the ES6, and the EC6. It plans to begin production and sale of the ET7 sedan next year. The number of vehicle deliveries is an indicator of the demand for company’s vehicle as well as its production ability.

NIO’s vehicle deliveries rose 422.7% compared to the year-ago quarter, marking the fastest pace of growth since Q2 FY 2019. Revenue for the quarter was 7.4 $1.1 billion, up 489.8% from the same period a year ago.

Higher deliveries and higher average selling prices along with lower material costs, helped NIO’s vehicle margin jump an astonishing 21.2% compared to -7.4% in the year-ago quarter. Vehicle margin determines the profitability per vehicle. In simple terms, higher margin means the company is getting more money for the vehicle sold relative to the costs of making those vehicles.

As mentioned earlier, NIO plans to enter Norway, and the Chinese EV manufacturer is expected to deliver its first ES8 SUV in late 2021, and then its ET7 sedan in 2022. The move to enter Norway, before expanding into other European countries, should not come as a surprise, because Norway is Europe’s most EV-friendly country.

EV sales accounted for 54% of all new vehicle sales in Norway in 2020. Norway offers generous subsidies on purchase of EV vehicles, which can slash the price of the vehicle by as much as one-third. Alibaba-promoted XPeng [NYSE: XPEV] delivered 100 vehicles to Norwegian consumers in December and, like NIO, plans to expand to other European nations as well.

Also, NIO stands to benefit from Tesla’s CEO Elon Musk’s recent feud with the Chinese government. Tesla’s China sales fell by about 67% in April from March, and NIO was one of the major beneficiaries of Tesla’s declining sales.

Chinese consumers registered 12,000 Teslas in March, but only 5,000 in April. In fact, NIO was the best-selling brand in China’s fast-growing all-electric SUV market in April, according to new data from the China Automotive Technology and Research Center.

NIO isn’t currently the biggest EV seller in China. That title belongs to Warren Buffett-backed BYD, which sold 131,000 battery electric vehicles in 2020. By comparison, NIO sold 44,000 EVs, 113% growth over 2019, and 20,060 vehicles in the first quarter, representing 423% year-over-year growth. BYD sold 53,380 vehicles through the first three months of 2021. 

So far, NIO offers three electric SUV models. Starting next year, the company is expected to roll out its highly-awaited ET7 luxury sedan. NIO also faces tough competition from XPeng and Tesla. 

Conclusion

It’s no secret that NIO, like most EV-focused auto stocks, has a lot to prove. NIO, however, has demonstrated to investors that it can sell its vehicles, and this is the reason it has received such a strong market reception. 

It boasts over $55 billion market cap, despite having produced just over 100,000 EVs since its inception. Profitability also looks to be a year or two away, but it’s making good progress on that front as well. Also, it would be interesting to watch the impact of chip shortage on the company’s overall production and revenue. 

NIO faces fierce competition at home and abroad, and the stocks are unlikely to rise immediately.  However, it’s an excellent long-term buy, as NIO possesses all the requisite qualities of emerging as a dominant force in the rapidly growing EV market. 

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.