As the year progressed, constant upsurge in selling and advertising expenditures coupled with rising operational costs kept electric vehicle manufacturer NIO Inc. on its toes. However, the tables have turned for the NIO stock with the infusion of new investments, Chinese stimuli, and escalating demand for its latest vehicle models. Is it opportune for investors to consider buying the NIO stock priced below $10 at this juncture? Let’s delve into the details.
The Resurgence of NIO Stock
Throughout the year, NIO stock presented a gloomy picture to its investors, reflecting a 26.3% decline in its shares year to date. Nevertheless, the tide seems to have shifted in the past month, with NIO stock outperforming the Automotive – Foreign industry by a substantial margin (+65.3% vs +0.9%).
In the recent five trading sessions, the NIO stock surged by 25.6% and broke past the 200-day moving average, indicating a bullish trend. But what exactly is driving this current upswing?
NIO Secures Fresh Investment
NIO witnessed a notable spike in its share value following the announcement of significant fresh cash injections from strategic investors in China. These investors are set to infuse RMB 3.3 billion ($470 million) into NIO China, the company’s primary operational segment.
In NIO China, the company is expected to retain more than 88% ownership, with strategic investors holding nearly 12% stake. NIO is also bolstering its struggling China division with additional capital.
However, to achieve profitability, emerging electric vehicle entrants like NIO necessitate substantial funding. Analysts predict that NIO will utilize approximately $2.8 billion in capital to expand its operations this year. Furthermore, cash outflows are projected to reach $1.1 billion and $850 million in 2025 and 2026, respectively.
Boost from China’s Economic Stimulus
Amid China facing challenges related to property and unemployment, the country’s economy received a shot in the arm with significant stimulus initiatives rolled out by the People’s Bank of China (PBOC). PBOC Governor Pan Gongsheng highlighted that various stimulus measures, including reductions in reserve requirements and short-term interest rates, were implemented to support the economy.
These stimulus packages aimed at revitalizing the economy prove advantageous for NIO, as they enhance consumers’ purchasing power, enabling them to acquire high-end electric vehicles such as the ES8 and ET9. Consequently, China’s economic revival propelled the NIO stock to greater heights.
NIO’s Innovation in New Models
The NIO stock is poised to receive a substantial uplift from the introduction of its highly anticipated budget-friendly model Onvo L60, expected to contend fiercely with Tesla, Inc.’s Model Y. Priced at $21,200 with a Battery as a Service (BaaS) model, the Onvo L60 is notably 40% cheaper than the Tesla Model Y starting at $35,280.
In terms of performance, the Onvo L60 surpasses the Model Y with a lower drag coefficient, leading to reduced energy consumption. Boasting a larger interior space compared to the Model Y, the Onvo L60 features a wheelbase of 2950 mm, significantly longer than Tesla’s 2890mm, thus outshining the Model Y in terms of pricing, performance, and comfort.
NIO Exceeds Production Targets
Recent deliveries surpassing the anticipated targets and improvements in vehicle margins have further enhanced NIO’s prospects. The company recorded a substantial increase in revenues in the second quarter, with deliveries of 57,373 vehicles, reflecting a remarkable 143.9% surge from the previous year. Sales of premium smart EVs significantly exceeded the 20,000-unit delivery mark.
With enhancements in component costs and supply chain efficiencies, vehicle margins are on the rise. In the second quarter, vehicle margins stood at 12.2%, marking a favorable comparison to 6.2% a year ago. NIO anticipates vehicle margins to escalate to around 15% by the end of the year.
Timing the Investment in NIO Stock
Investors are advised to maintain their stakes in NIO stock as favorable prospects lie ahead, bolstered by capital injections from Chinese partners, China’s robust stimulus efforts, competitive pricing of new models, and the substantial increase in EV production to meet escalating demand.
The recent infusion of capital prompted Citigroup Inc.’s C Jeff Chung to raise NIO’s short-term price target to $8.90 per share from the current $6.7. Kevin Lau of Daiwa Securities Group also revised NIO’s price target to $10.
However, the operational efficiency of the company remains a lingering concern. Notably, NIO’s debt-to-equity ratio of 71.5% surpasses the peer group average of 23%, highlighting elevated debt levels on its balance sheet relative to competitors. Hence, prospective investors should consider entering the NIO stock realm once operational inefficiencies are effectively addressed.
