Should You Buy the Dip in Nio?

Chinese EV manufacturer NIO (NIO) is facing a pullback due to negative reports about the company. However, NIO did not earn the moniker “the next Tesla” for no reason. Its strong business model, which exploits its access to lower cost lithium (a key raw material electric vehicle batteries) along with its recent development of a new, more-powerful battery and a pioneering battery-as-subscription plan to reduce customers’ costs, will likely drive to stock to a new rally soon.

NIO Ltd. (NIO) has been one of the leading Chinese EV manufacturers making waves. The company’s impressive stock price performance has led it to be dubbed as the next Tesla (TSLA). Operating in China, NIO has a distinct advantage of lower cost lithium, which is a key raw material for powering electric vehicles. The company has pioneered a BaaS (battery-as-a-subscription) model which reduces the costs through upgradable battery systems in its vehicles.

Despite an impressive business model, the stock declined 20.3% over the past five days, owing to the negative report published by short seller Andrew Left of Citron Research. Though investors adopted a bearish outlook regarding NIO following the report, the company recently reported record sales for the month of November.

The stock outperformed the market with 970.7% year-to-date gains by reporting triple digit growth in sales for 11 months ended November 2020. This, combined with several other factors, has helped NIO earn a “Buy” rating in our proprietary rating system.

Here’s how our proprietary POWR Ratings system evaluates NIO:

Trade Grade: B

NIO is currently trading above its 50-day and 200-day moving averages of $40.54 and $20.33, respectively, indicating a golden-cross uptrend. The stock has gained 620.9% over the past six months, reflecting solid short-term bullishness.

NIO raised $1.30 billion through an American depository share offering earlier this year, which is expected to contribute to its the research and development of electric car ecosystems and automated technologies as well as developing its global market presence. It is the first company to launch ‘battery as a service’ (BaaS) subscription model, allowing customers to purchase electric vehicles and battery packs separately.

On November 6th, NIO launched a 10kWh battery with upgrade plans. With 37% higher energy density, the new battery is expected to boost NIO vehicles to reach up to 615 km, while improving space utilization by 19.8%. This should boost the demand for the batteries for upgrading, as well as newer NIO models.

NIO’s total revenues increased 146.4% year-over-year to RMB 4.53 billion in the third quarter ended September 2020. Vehicle sales grew 146.1% from the same period last year to RMB 4.27 billion. Gross profit rose significantly over this period to RMB 585.80 billion, compared to negative year-ago value. NIO delivered 5,291 vehicles in November, up 109.3% from the same period last year. The company had delivered 36,721 vehicles as of November 30th this year, indicating a 111.1% rise year-over-year.

Buy & Hold Grade: C

In terms of proximity to 52-week high, which is a key factor that our Buy & Hold Grade considers, NIO’s positioning is not favorable. It is currently trading 24.8% below its 52-week high of $57.20, which it hit on November 24th.

NIO’s revenue increased 48.2% year-over-year. Though NIO’s revenue has been increasing consistently, the company has failed to deliver profits. It reported negative EPS and net income in the trailing 12-months, raising concerns regarding the sustainability of the stock’s momentum.

Peer Grade: B

NIO is currently ranked #15 out of 115 stocks in the China group. Other popular stocks in this group are Baidu, Inc. (BIDU), Yum China Holdings, Inc. (YUMC) and Bilibili, Inc. (BILI).

BIDU, YUMC and BILI gained 14%, 18.2% and 264.1% year-to-date, respectively. This compares to NIO’s 970.7% returns over this period.

Industry Rank: B

The China group is ranked #40 out of 123 industries in the universe. China’s impressive recovery from the pandemic has made it the only economy to report positive GDP growth this year. In contrast to most developed countries, which are still battling recession, coupled with a second wave of coronavirus worsening their economies, most Chinese companies are witnessing a strong rebound owing to strengthening local consumer demand.

Overall POWR Rating: B (Buy)

NIO is ranked “Buy” due to solid short-term bullishness, impressive business model and revenue performance, underlying industry strength and growth momentum, as determined by the four components of overall POWR Rating.

Bottom Line

The recent dip in NIO has been caused by a report released by a short seller who benefits from the dip in the stock. NIO has delivered impressive performance in the domestic markets so far this year and is well positioned to expand globally. With a lower cost of production, NIO is poised to provide stiff competition to industry leaders as it enters new markets. So, the current price decline offers a solid entry point.

NIO has an average broker rating of 1.33, indicating favorable analyst sentiment. Out of 12 Wall Street analysts that rated the stock, 9 rated it “Strong Buy”. Analysts expect NIO’s EPS to rise 74.4% in the current quarter ending December 2020. The company has an impressive earnings surprise history: It beat the street EPS estimates in three out of trailing four quarters. The consensus revenue estimate of $967.84 million indicates a 137.8% growth year-over-year.

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NIO shares were trading at $45.27 per share on Monday afternoon, up $2.23 (+5.18%). Year-to-date, NIO has gained 1,026.12%, versus a 16.17% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.


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