Is It Time To Buy Nio?

This year hasn’t been one for investors in Nio Inc NIO to remember with much fondness.

The Chinese EV maker that was once the darling of the sector has plummeted as increasing competition, price wars and an overall decline among Chinese stocks has ravaged the company’s market capitalization.

Nio, which once traded as high as the mid-60s, is now just $7.44 an ADR. While competitors XPeng Inc XPEV, BYD Company Limited BYDDY BYDDF and Li Auto Inc LI have all posted strong gains throughout 2023, in line with incumbent Tesla Inc TSLA, Nio stands out like a sore thumb, down 26% year-to-date.

Wall Street analysts think that the pessimism is misplaced, however. Of the 13 banks covering the company’s stock, the average target price that analysts have for Nio is $14.24, while the highest target is $19.20, according to Nasdaq. That’s a full 90% - 160% upside from the company’s present price. What’s more, in the past two weeks, Nio has begun trading at a discount to the bottom-dollar target price that analysts have set for the company’s shares.

There are reasons for optimism. On October 1, the company reported that it delivered 15,641 EVs in September, a year-on-year increase of 43.8% and 55,432 EVs for the third quarter overall, a 75.4% improvement. After jumping to $9 an ADR on the news, however, the shares have since fallen back after Tesla reported worse-than-expected results for Q3.

Analysts generally concur that while Nio is a risky buy right now, sales will likely increase over the next year. Meanwhile, the company’s profit margins, they say, are less certain, justifying the recent downturn in the company’s share price.

CMB International, a Chinese merchant bank, predicts sales growth of 20% throughout 2023 but a profit decline of 7% as the price war between EV makers eats into the company’s margins.

But there are some crucial differences between Nio and Tesla, maintain others. While the latter is focused on producing budget EVs for mass market, Nio’s range of luxury EVs serve mostly higher-end customers, where profit margins are less constrained.

With Nio still losing money, a lot of the company’s potential success rests on how much funding it is able to obtain and at what cost, and how it is able to manage costs.

In funding terms, Nio raised $1 billion last month, about half of which was used to redeem future-dated loan notes and save the company on future interest payments while the other half was used for general administrative purposes. The company raised the money by issuing convertible debt at a premium of 50% to the current market price. That makes fundraising comparatively cheap to today’s value for the EV upstart, but also means that it looks more expensive if the stock races over Wall Street’s top estimates around the $20-mark.

In terms of keeping costs low, Nio has scrapped unnecessary roles such as those of its product expert in its China showrooms and is using the money instead to pay salespeople, according to recent Chinese-language media reports. Sales commissions for its showroom staff have been raised as much as four-times this year, say employees. Nio is also targeting a dealer network across Europe to increase sales there, which have been strong this year.

Elsewhere, Nio is getting more creative about how to maintain its customer following and extract higher product margins in other areas of the sales channel. The company launched its own handset in September, which is aimed at creating loyalty among today’s smartphone-connected consumers. Further, it entered the insurance business this year too, with the goal of tailoring better-priced, higher-margin insurance products to its own range of sedan and sports vehicles.

Most recently, Nio was rumored to be mulling the purchase of some of its own manufacturing plants, after one of its suppliers, Anhui Jianghuai Auto said it was considering a sale. The supplier is located in the same Chinese province as its recent insurance acquisition.

So far, much the company’s successful endurance has been down to the Chinese government’s subsidization of its loss-making vehicles. As long as the government remains supportive of Nio, it’ll continue to survive and get stronger, maintain analysts who have higher priced ratings on the stock.

A recent report by The New York Times found that Nio loses around $33,000 per car it sells, which is subsidized by the Chinese government.

In light of the big Chinese government backing, Nio can successfully manage to fight off the price war without its margins getting too hurt by getting creative with its supply chain and can continue to increase sales: as such it may appear very undervalued at its current price, say bulls.

James Foord, head of investment group The Pragmatic Investor, suggests that investors fish for prices as low as $5.59 as the recent selling wave gets underway (in Hong Kong Monday, Nio’s stock was another 3% lower).

“From a trading perspective, the current price is a good spot to enter with a tight stop. However, if I had to pick, I think a breakdown into new lows is more likely. Having said that, I'd still see this as a great buying opportunity,” says Foord.