NIO: Long-Term Investors Will Be Rewarded (NYSE:NIO)

In the past NIO (NYSE:NIO) was a favorite of traders as it started its steep upward climb on June 1, 2020, when it was trading at approximately $3.75 as a low, and rocketing to about $67.00 per share on January 11, 2021.

Since then it has crashed to a 52-week low of $8.375 on October 4, 2022, and has since rebounded to trade at $11.60 per share as I write.

While facing about as strong of headwinds a company could face, NIO has been able to find support because its business strategy remains a strong one, and it is starting to deliver vehicles at levels that should continue to consistently rise heading into and throughout 2023.

That doesn’t mean the company is going to go through periods of volatility going forward, only that its growth trajectory, even with the occasional speed bump, should continue to be solid in the quarters and years ahead.

In this article we’ll look at the ongoing strength of its business model, its expansion into Europe, and some of the recent numbers from its earnings report.

Some of the numbers

Revenue in the third quarter of 2022 was $1.83 billion, up 32.6 percent year-over-year, beating by $50 million. The increase in revenue was primarily attributed to a boost in vehicles sales from higher deliveries and its diversified product mix.

The company reported its November 2022 deliveries climbed to a record high of 14,178 vehicles, up 30.3 percent year-over-year. Year-to-date it has delivered 106,671 vehicles, up 31.8 percent year-over-year.

Management said it has plans to accelerate production and delivery in December 2022.

Vehicle margin dropped in the reporting period from 18 percent last year in the third quarter to 16.4 percent in the third quarter of 2022. The reason given for the decrease in vehicle margin was the rising cost per unit of batteries.

As the company continues to boost deliveries and sales, the added cost of batteries should be mitigated, improving its vehicle and gross margins.

Gross margin in the quarter dropped from 20.3 percent last year in the same reporting period to 13.3 percent in the third quarter of 2022. Along with above-mentioned reasons for lower vehicle margin, the other negative catalysts were a drop in revenue from high-margin automotive regulatory credits, and from more investment in its power and service network.

Strong business model

I’ve talked a number of times in the past about the strength of NIO’s business model, so I won’t do a deep dive in this article.

But to remind readers, the EV maker has taken steps to expand the number of models it offers consumers, which allows it to compete at most price points consumers are able or willing to buy at.

That strategy was reinforced as a good one by the increase in deliveries in the last reporting period, and in the years ahead it’s going to be a key differentiator for the company against its peers in its domestic market. Once it further establishes a foothold in Europe, I see it being it having as much, if not more of a competitive advantage there.

It’ll take time, but that’s the way to invest in NIO after its wild ride in 2020, where emotion and FOMO drove its share price beyond its valuation at the time.

The European market

NIO first focused on entering Europe via Scandinavian countries the Netherlands, Denmark and Sweden, but recently has started expanding to Germany, which I believe is easily the most important market in Europe, and as NIO gains a foothold there, it will gain the momentum to expand to other large markets like France and Italy.

For the purpose of developing artificial intelligence and autonomous driving for its vehicles, NIO has built an R&D and testing center in Berlin. I see that as a strategic move by management to establish itself in that important German and European city.

It is also on track to open NIO Houses and NIO Spaces in Frankfurt, Germany, as well as in other European cities like Rotterdam, Copenhagen, and Stockholm, along with Berlin.

While the decision to use Berlin as the R&D and testing center is an important one for AI and autonomous driving in Europe, it’s also significant in that it will, without a doubt in my mind, be just as important in branding NIO to the broader European market. NIO’s entrance into the European market is a long-term play, but once its vehicles start to sell there at meaningful levels in the years ahead, it’s going to be an important part of its growth narrative.

Conclusion

Even though NIO continues to face headwinds that are similar to its peers, it is starting to operate in an improving supply chain market, and one that appears to be more favorable in regard to the impact of the zero-COVID policy that the Chinese government has instituted in the recent past.

It seems like that is being gradually loosened, and barring some significant return of COVID to parts of China that would be temporarily detrimental to the performance of NIO, I think this is going to be a tailwind for NIO going forward.

As for its battery swapping stations, the company built 1,210 of them as of the end of the third quarter, adding another 11,842 charging piles to the mix. By the end of 2022 the company will have more than 1,300 swap stations across its geographic footprint.

NIO has a strong balance sheet, excellent business model, and is starting to work its way through some of the headwinds that have hindered it over the last year or two.

There are of course still challenges ahead, including the uncertainty surrounding the macro-economic conditions it may face in 2023, some possible disruptions from outbreaks of COVID-19 in China, and working on lowering costs in order to improve margins.

Nonetheless, the company’s plans to accelerate production and deliveries in the fourth quarter, if it’s able to execute on its plans, should be a strong tailwind for the company as 2023 approaches.

Taken together, I like what I see with NIO, and for investors with a long-term outlook on the company, they should be nicely rewarded over the long haul.

And let’s not forget that the company is trading at a very good entry point.