Nio's Stock Price Reflects 'Over-Optimism': Goldman Sachs Downgrades To Sell

Nio Inc – ADR NIO shares are cooling off following a strong rally since reporting its monthly deliveries in early July.

The Nio Analyst: Goldman Sachs analyst Fei Fang downgraded Nio from Neutral to Sell and reiterated the $7 price target, suggesting 46% downside from current levels compared to the 16% drop for China OEMs the firm covers.

The Nio Thesis: Following the 89% rally over the past month, Nio's stock price currently reflects "over-optimism," considering the fact there are no substantial changes to volume/profit expectations, Fang said in a Friday note.

In the short term, the analyst expects capital injection at Nio China to fund its 10-billion-yuan cash burn in the next two years. In fiscal years 2020, 2021 and 2022, revenues are estimated to grow 80%, 86% and 72%, respectively, helped by volume expansion of existing SUV models and launch of new products.

Fang forecasts store network size to rise from 70 outlets, including Nio House and Nio Space, at the end of 2019 to 200 by December. The analyst also looks ahead to improvement in margins, leading to significant free cash flow improvement in the coming years.

Delving into the prospects for the long term, the Goldman Sachs analyst believes Nio's investment case will be based on the optionality for China's structural auto premiumization and EV adoption, combined with the scarcity of being China's first home-grown high-end passenger vehicle brand.

"The Nio brand's positioning provides the premium pricing power that we expect the company to leverage across model cycles and powertrain technologies," Fang wrote in the note.

Goldman estimates Nio's market share of premium vehicles at 1.2% in 2020. This is expected to improve to 5.8% in 2025 and 7.4% in 2030.

NIO Price Action: Nio shares were down 9.3% to $11.72 at the time of publication.

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