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

Thesis Summary

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

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

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

With that said, I am changing my rating back to a strong buy, as I see this as an opportunity to both buy NIO near the low while also buying shares into strength.

Recent Results

In my last article on NIO, I talked about 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 trend reversal, I am shifting my view back to a strong buy.

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

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, it is perhaps the shrinking margins which investors have been most concerned about:

Although 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. NIO is in a very competitive market and is also fighting supply disruptions, along with higher input 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 an 800-volt pack and use a combination of in-home and outsourced batteries for its production needs.

This follows a prior announcement that 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 that 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 announced recently 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 building 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 also 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’s 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 it 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 be increasing the quota for passenger cars. In China, the ownership of cars is limited, but this limit will be increased this year, which will be a 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 numerous catalysts in play now that were not present 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 have shifted, COVID lockdowns in China are ending, the government is moving to increase consumption, and both NIO and the market as a whole have come down to much more attractive valuations.

We are beginning to see signs of a bottom, and this is also evident if we look at NIO’s price chart:

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

Lastly, the RSI and MACD are also giving us bullish indications. On 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 gained 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 this seems pretty low considering future growth prospects:

By 2025 NIO could achieve between $23-$35 billion in revenue, implying a fwd P/S of 0.89. NIO’s average P/S since its inception has been close to 11, and Tesla currently trades at a P/S close to 8. NIO’s P/S should be closer to this in the long run, and even using a conservative figure of 6, NIO shares could easily double from here.

On top of that, 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 company that is growing fast and is nowhere near bankruptcy. Realistically, the shares can’t go down much below recent lows.

Risks

Investing in NIO doesn’t come without risks. Chinese stocks are in a delicate situation right now, 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’s 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, quickly 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 the 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 believe the most likely scenario now is that the bottom is in.