Shares of Nio Inc (NYSE:NIO) have experienced significant ups and downs in the past couple of years. As a Shanghai-based electric vehicle (EV) seller, NIO stock survived a challenging period in 2020, even witnessing a remarkable 1,100% surge that year. However, the following years 2021 and 2022 saw sharp declines for the company.
In 2023, NIO has managed to gain over 35%, indicating a potential rebound. Nonetheless, its year-to-date returns still lag behind other Chinese EV peers like Xpeng Motors (NYSE:XPEV), Li Auto (NASDAQ:LI), and the American-based giant Tesla (NASDAQ:TSLA), which remains the global leader in battery electric vehicles (BEVs). Despite the recent recovery, NIO is still 79% below its all-time high, reached in February 2021. Nevertheless, some analysts believe that the current stock levels could present an attractive buying opportunity.
Reasons Behind NIO’s Underperformance
Several factors have contributed to NIO’s lackluster performance over the past two years, both on a macroeconomic and company-specific level. Firstly, Chinese stocks, in general, have struggled to perform well during this period. Concerns over China’s tech crackdown in 2021 and its zero-COVID policy’s impact on investments have weighed heavily on investor sentiment. Despite the country’s shift away from the zero-COVID policy, the economic rebound has been slower than anticipated, further impacting Chinese stocks’ attractiveness compared to their U.S. counterparts.
Additionally, the ongoing EV price war in China has not helped NIO’s case. While the company initially refrained from joining the price war initiated by Tesla, it eventually had to lower car prices in June. Efforts to resolve the price war through an automotive association’s intervention were later retracted due to antitrust concerns. As NIO primarily operates as an EV seller rather than a manufacturer, it may be more vulnerable to the ongoing pricing competition.
Furthermore, the investor sentiment towards unprofitable companies, particularly in growth sectors like EVs, has shifted negatively, leading to a decline in valuation multiples. Additionally, rising interest rates have further impacted the appeal of growth stocks like NIO.
NIO’s operational and financial performance has also been subpar. Vehicle deliveries in the second quarter of 2023 declined from the previous year, and the gross margin in the first quarter of 2023 showed a significant decline. NIO’s net loss in Q1 2023 also doubled compared to the previous year.
Bright Spots for NIO’s Future
Despite its recent struggles, several factors suggest a positive outlook for NIO. The macro-environment in China has improved, with the government emphasizing its support for the EV industry, leading to the extension of the EV tax break until 2027. NIO also boasts a strong balance sheet with substantial cash reserves, providing it with a competitive advantage over some of its smaller EV peers.
Moreover, NIO has expanded its product portfolio and recently launched the ET5 Touring, which is expected to enhance the company’s market share. As the company ramps up deliveries and explores new overseas markets, its financial performance is anticipated to improve.
Analysts foresee a positive trajectory for NIO’s revenues, projecting growth rates of 34.8% and 47.5% year-over-year for 2023 and 2024, respectively. Additionally, NIO’s forward price-to-sales multiple suggests that Nio stock could be relatively undervalued compared to its Chinese EV peers.
Wall Street analysts’ ratings for NIO range from a Moderate Buy to a Strong Buy, with a Street-high target price that represents a premium of 58% over the current prices. Morgan Stanley, among others, has expressed optimism about NIO’s potential for catching up with other EV names.
As the next key triggers, NIO’s July delivery report and Q2 earnings release will be closely monitored, offering insights into the company’s production ramp-up and how it navigates the ongoing EV price war.
Overall, NIO’s potential for improved earnings and expanding valuation multiples bode well for a potential rally, especially as market sentiment toward Chinese stocks continues to improve.
Featured Image: Megapixl
