NIO: Results Are In, And Maybe So Is The Bottom (NYSE: NIO)

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Thesis Summary

NIO Inc. (NYSE: NIO) previewed its Q1 results ten days ago, and despite what some have qualified for disappointing results and guidance, the stock is up About 30% in the last month.

Results, while not great, have been good in challenging macroeconomic context. But most important are the numerous growth catalysts that have been announced in the last few months.

From the recent rally, NIO shares have shown clear evidence of a sentiment shift and early signs that could be in.

With that said, I see this as a great opportunity to buy.

Recent Results

In my last article on NIO, I discussed the challenges posed by the CCP and delisting fears. I gave NIO a buy rating back then since I was fundamentally bullish, but the environment and share price were not. Now, with the latest results in place, numerous catalysts and a strong reversal trend, I am shifting my view back to a strong buy.

Let’s start by looking at deliveries for the latest quarter.

NIO Q1 Deliveries

NIO Q1 Deliveries (SI NIO)

NIO delivered 25,768 vehicles in Q1, which was only a 0.3% increase versus the latest quarter but a 25% increase YoY.

While deliveries have certainly been underwhelming, investors may have been most concerned about:

NIO Financial Results

NIO Financial Results (NIO IR)

While NIO provided a technical beat on EPS, vehicle margin has contracted by 310bp YoY and 280bp QoQ. The gross margin now sits at 14.8%, while it was 19.5% this time last year.

Investors are rightly asking themselves how a company like NIO will return value to them in the future. It is a very competitive market and it also has higher supply costs, brought about by inflation.

However, if we focus on what NIO can control, we see strong initiatives coming from the company to improve profitability, improve their product offerings, and keep growing at a fast rate.

Numerous Catalysts

NIO is doing everything it can to solve the problems it faces today. But complex problems require complex solutions, and it will take time for NIO to turn things around.

One such initiative is NIO announcing plans to develop its own battery pack in 2024. The company will produce the 800-volt pack and use a combination of in-home and outsourced batteries for its production needs.

NIO was investing $ 32.8 million to develop a lithium-ion battery lab in Shanghai. This is a great move on NIO’s part, as lithium lies at the heart of battery technology and is becoming an expensive and scarce resource. EV makers who can find a way to optimize the use of lithium will have a great advantage over competitors moving forward.

Also, NIO’s founder William Li recently announced that the company would be launching a development (R&D) center for autonomous driving and artificial intelligence in Singapore, where NIO shares were recently listed.

On top of that, it’s worth mentioning that NIO is another factory in Lu’an city, which will be completed in the first half of 2023. This park will make aluminum die-casting products, which will not only improve NIO’s margins but help reduce emissions by 50%.

On the profitability front, NIO is doing its best to keep costs down by investing in better technology and increasing its production capacity, which will provide them with economies of scale.

On the more imminent growth part of the equation, we also have two recent catalysts that will help NIO maintain high levels of growth.

Firstly, the company has announced the launch of the ES7, a mid-large-sized SUV. What is most notable about this launch is that it will be the first NIO vehicle to operate on the new NT 2.0 technology platform, which features level 4 autonomous driving. The ES7 could be a game-changer for NIO, and should help boost sales starting in September.

Furthermore, NIO will also be getting help from the Chinese government. As one of the many measures introduced by the CCP to promote consumption after the pandemic, China will increase the quota for passenger cars. In China, the ownership of cars is limited, but this limit will be increased this year, which will be the catalyst for car manufacturers as a whole.

To this, we can add the fact that China will probably be expanding EV subsidies until next year.

In conclusion, we have many catalysts in play now that were not a month ago, which is changing investor sentiment.

Early Signs of A Bottom

The events of the last month have propelled NIO shares higher since we reached a bottom at around $ 14. Investor sentiment looks to be shifted, COVID lockdowns in China are ending

NIO’s price chart:

NIO Technical Analysis

NIO Technical Analysis (Author’s work)

As we can see from the chart above, NIO has now escalated the downtrend channel it has been in since November of last year. On top of that, we’ve seen very impulsive moves, with NIO rallying over 10% on numerous days. From the Elliott Wave perspective, we could point out 5 waves up, forming a diagonal.

Lastly, the RSI and MACD are also giving us bullish indications. Since the 1D chart, the RSI has established a clear uptrend, but it is still far from overbought. The MACD has avoided a bullish crossover and gains momentum, which is also encouraging.

All in all, we are seeing early signs of a bottom. The sentiment is changing, which is backed up by the technical picture.

Valuation

EVs are essentially computers on wheels. That’s why comparisons and valuations with “traditional” auto manufacturers are inappropriate. EV makers are like tech companies, collecting data with every ride, and the value of this data is hard to calculate (though we know it is significant).

With that said, NIO currently trades at a P / S of 4 and

NIO Revenue Forecasts

NIO Revenue Forecasts (Seeking Alpha)

By 2025 NIO could achieve between $ 23- $ 35 billion in revenue, implying a f / P of S of 0.89. NIO’s average P / S since its inception has been close to 11, and even using a conservative figure of 6, NIO shares could easily double from here.

Investing in NIO at these prices comes with a considerable safety net. NIO has about 5 $ / share and is trading at only four times that. This is a growing company and nowhere near bankruptcy. Realistically, the shares can’t go much below recent lows.

Risks

Investing in NIO doesn’t come without risks. Chinese stocks are now in a delicate situation, given geopolitical tensions and delisting fears, which I addressed in my last article.

Furthermore, the Chinese economy is slowing down, and expectations for the coming months are low. Even by the company estimates, delivery growth year on year should be close to 5.0% to 14.2%.

As mentioned above, NIO favors a challenging macro environment and a competitive landscape, but I see evidence that the company can turn this around.

Final Thoughts

NIO Inc is one of the leading EV manufacturers in China, rapidly becoming a global company. While recent results could be interpreted as weak, the company is making the right moves to improve profitability and keep growing. Furthermore, investors should remember that EVs are more than just cars, and the value of data and technology in them is hard to calculate at this point; this is why Tesla and NIO command much higher valuation multiples.

While it is still early days, I think the most likely scenario is now.

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