NIO Inc. NIO, a prominent player in China’s electric vehicle (EV) market, saw its shares rise 12% yesterday following news of bolder economic support from China’s top leaders. Its close peers, XPeng XPEV and Li Auto LI, rose 13% and 8%, respectively.
As the country prepares for a potential trade war with the United States when Donald Trump returns to office, China has committed to more aggressive fiscal measures and moderately looser monetary policies to stimulate domestic consumption. These moves are likely to reinvigorate the economy and combat stagnation. It bodes well for NIO, a company heavily reliant on the Chinese market for its sales.
Given NIO’s sharp rally yesterday, investors may be wondering whether the stock is ready for a sustained rally or if this is just a short-term bounce. Let’s delve into the stock’s current position, growth prospects, and whether it’s a good time to buy or wait for a better entry point.
NIO’s Strong Product Lineup and Battery Swap Tech
The company boasts a variety of models, including the ES6, ET5T, ES8, EC6, and more, which have driven its delivery growth. It is preparing to launch its flagship ET9 luxury sedan in the first quarter of 2025. ET9 is set to target high-end buyers, with the price tag exceeding $110,000. One of the key features of the ET9 is its steer-by-wire system, which promises improved handling and a superior driving experience.
In addition to its luxury offerings, NIO has launched the ONVO brand, which is aimed at attracting a broader consumer base with more affordable EV models. The L60, ONVO’s first vehicle, began deliveries in September, and the brand’s production capacity is expected to reach 10,000 units by December and 20,000 units by March 2025. With an expected 10% gross margin in 2024, growing to 15% in 2025, ONVO has the potential to drive significant revenue growth for the company.
NIO is also preparing to expand its product portfolio further with the Firefly brand, targeting the compact car segment. This new brand, which will be unveiled at Nio Day 2024 on Dec. 21, will contribute to the company’s global expansion efforts. The first Firefly model is expected to begin deliveries in 2025, further bolstering NIO’s presence in both domestic and international markets.
Moreover, NIO differentiates itself from competitors with its unique approach to EV infrastructure. Rather than relying solely on traditional charging stations, NIO has developed a network of battery-swapping stations, allowing customers to quickly exchange depleted batteries for fully charged ones. This system sets NIO apart in the highly competitive EV market and could be a key factor in sustaining its growth trajectory.
NIO’s Improving Margins & Breakeven Targets by 2026
NIO has shown progress in vehicle margins. The metric grew to 9.2% in the first quarter of 2024, was 12.2% in the second quarter and increased to 13.1% (up 2.1 percentage points yearly and 0.9 percentage points sequentially) in the third quarter of 2024 due to lower material cost per unit. This improvement was due in part to cost optimization in components and the supply chain, along with a reduction in material costs per unit. Encouragingly, NIO targets a vehicle margin of around 15% by the end of 2024.
NIO expects to double its delivery volumes in 2025, buoyed by the introduction of new models. The company also expects its losses to narrow gradually in 2025 amid sales growth and cost savings. By 2026, the company aims to achieve breakeven. If that happens, it will be a big milestone for the company.
Price Performance & Valuation
Year to date, NIO has underperformed the industry, sector, S&P 500 and its closest peers, LI and XPEV.
YTD Price Performance Comparison
Image Source: Zacks Investment Research
Once dubbed as the "Tesla of China," NIO’s market cap has now fallen below $10 billion, down from $100 billion in 2021.
From a valuation standpoint, NIO’s price-to-sales (P/S) ratio, currently at 0.65, is well below its 5-year median values. It is also trading at a discount compared to XPEV and LI.
NIO’s P/S F12M Vs. XPEV & LI
Image Source: Zacks Investment Research
NIO is Not a Buy Yet
NIO's recovery remains tied to its ability to achieve consistent margin improvements and revenue growth. With the stock trading at a discount, patient investors may find value in holding NIO for the long term, but entering now may not be the optimal move.
The loss estimates for current quarter and full year have widened over the past seven days.
Image Source: Zacks Investment Research
While management expects to break even by 2026, it’s important to temper the optimism with caution, as EV companies have historically been overly ambitious with their forecasts.
For now, the most prudent approach is to adopt a wait-and-see strategy. Keep an eye on NIO’s performance over the next few quarters, especially as the company rolls out new models and expands its global footprint. If the firm can prove its ability to deliver consistent growth, it could become a compelling long-term investment. Until then, it’s better to stay on the sidelines.
NIO currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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