Stocks to buy

Nio Stock Seems To Be Gearing-up for the Next Big Rally

I would have been worried if the big rally in electric vehicle stocks sustained well into 2021. It seemed that EV stocks were in a bubble territory.  NIO (NYSE:NIO) stock touched a high of $66.99 in February.

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However, significant profit taking and concerns related to chip shortage resulted in a sharp correction for most of the sector, including Nio, which corrected down to $35.20. The shares then consolidated at lower levels and gradually trended higher to $44.90.

Now around $43 a share, I believe that this consolidation is a good opportunity to consider fresh exposure to the stock.

Considering the industry outlook, the world is still at an early stage of electric vehicle adoption. If projections hold true, there is ample headroom for growth over the next decade. And Nio seems among the players that’s positioned to survive and grow even as competition intensifies.

Talking about the likely growth, it’s expected that EVs will account for “three out of five new cars on China’s roads by 2030.” Further, Deloitte believes that the EV industry is expected to grow at a CAGR of 29% over the next decade.

Clearly, industry tailwinds are the key factor that will support a rally for Nio stock. At the same time, company-specific developments remain positive.

Big Cash Buffer Behind NIO Stock

Nio seems all geared-up for aggressive growth in the next few years. The company has positioned itself for sustained growth with a cash buffer of $7.3 billion as of March 2021. I see the following factors as catalysts NIO stock upside.

Nio has already commenced the construction of a new factory. Production from the factory is expected to begin in the third quarter of 2022. The factory is likely to have an annual production capacity of a million vehicles. The plant is also likely to support the company’s expansion plans in China and internationally.

In China’s passenger car market, sedans and SUVs make-up around 46% of total sales. In January 2021, Nio unveiled its first electric sedan model, ET7. Once the model goes into mass production, the company will see further growth in vehicle deliveries.

Nio is likely to kick-off its European expansion plan in 2021. The company is expected to open its first overseas store in Oslo in September. It’s very likely that Nio will spread its wings across most major European markets in the next two to three years. Nio has also announced plans to have at least 4,000 battery swapping stations globally by 2025. International expansion will ensure that vehicle delivery growth remains strong in the next few years.

Improvement in Financial Profile

It’s worth noting that for Q2 2021, Nio delivered 21,896 vehicles. On a year-on-year basis, the company’s vehicle delivery increased by 111.9%. As strong delivery momentum sustains, the company’s financial profile has improved significantly.

To put things into perspective, the company reported negative vehicle level margin of 7.4% in Q1 2020. By Q4, the vehicle margin improved to 17.2%. Further, for Q1 2021, the margin was 21.2%.

Clearly, as vehicle deliveries increase, margins are likely to continue improving, with the resultant positive impact on operating and free cash flows. In fact, the company reported positive operating cash flow of $299 million for 2020. Over the next few years, Nio is likely to be internally funded. Therefore, I don’t see any financing challenges for the company.

Concluding Views

Nio has a strong position in China in the premium car market. Factors such as battery-as-a-service and battery swap stations are likely to boost sales. Additionally, growth in international markets will just begin in 2021.

Nio also has a strong research and development team. This will ensure that the company is ahead in terms of technological advancement. Introduction of new models with enhanced features will continue to boost vehicle delivery growth.

Furthermore, the transition to electric vehicles is likely to last beyond 2030. This makes NIO stock worth considering for the long-term portfolio. As global expansion materializes, I would not be surprised if the shares trade above $100 in the next 24 months.

On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.