Why NIO Is Probably Heading Much Higher

Summary

• NIO has been one of the worst-hit stocks during the selloff, dropping by 82% from its highs at one point.
• While investors have been especially hard on NIO due to China's COVID-induced restrictions, the decreased sales dynamic is a temporary phenomenon.
• NIO's potential in China is massive, and the company has ambitious goals to expand abroad.
• Also, when you buy a NIO, you get a top-of-the-line, high-quality performance vehicle, not your average EV.
• As NIO continues to grow sales and improve profitability, its share price should go much higher in the coming years.

Robert Way/iStock Editorial via Getty Images

NIO Inc.'s (NYSE: NIO) stock has gotten crushed along with the rest of China. We saw the company's stock crater from its 2021 all-time high of about $68 down to just $12 in recent months.

NIO(StockCharts.com)

That is a jaw-dropping 82% decline. The stock has recovered since the panic selling, but the shares are still very attractive at around $21. NIO's stock has been victimized due to the overall decreased appetite for Chinese stocks, the recent slowdown in global equities, and Chinese COVID-19-related lockdowns. However, the excess pessimism has created a remarkable buying opportunity in NIO's stock, and it's still not too late. China's COVID-19-related restrictions are easing, and NIO should continue growing sales in the largest car market in the world. Moreover, NIO is expanding to Europe and expects to be in 25 countries and regions by 2025. The company's stock has rebounded off the recent lows, should stabilize, and will likely continue heading higher in the coming years as the company advances.

Have You Seen NIO Cars?

NIO is not just another electric vehicle ("EV") manufacturer. The company's cars are beautiful, and when you are in one, you feel the NIO experience. The company has an awe-inspiring lineup of seven vehicles. While most of the company's sales have been in its three primary SUVs (ES8, ES6, and EC6), the company recently began making deliveries of its flagship ET7 sedan. Moreover, sales of the company's mid-sized, mass-market ES7 and ET5 vehicles should start soon (August/September 2022). NIO also has the EP9, a hypercar with a cost of about $3.5 million, the fastest EV ever built.

So, it's clear that when you are driving a NIO, you're not driving a Chevy Bolt or a Prius. You're not driving a Geely or a BYD. When you're in a NIO, you're in a high-quality, top-performing EV with remarkable capacities. For reference, the ET7 in its 150 kWh modification has more than 650 horsepower, can run about 621 miles on a single charge, and can do 0-60 in about 3.7 seconds. Now, that's excellent performance for any car, not just an EV. Therefore, NIO's performance blows it right by most of its EV competitors and places the car company in a unique premium EV class along with Tesla and several other exclusive names.

China Easing Lockdowns

After months of stringent restrictions, China has begun to ease COVID-19 lockdowns. Residents of major cities like Beijing and Shanghai are free to move around again, and that's a very constructive development for NIO and other companies. Therefore, easing the lockdowns is a very favorable development, and the disruption to NIO's deliveries was probably just a transitory phenomenon.

Nio sales(Insideevs.com )

We see the poor YOY performance in April and May as China struggled with the COVID pandemic. However, the authority has made significant progress in battling the virus. Therefore, NIO's sales should see a healthy increase in the coming months. Generally, excluding the pandemic-induced slowdown, we see a healthy trend in Nio's sales.

Nio deliveries(ir.nio.com)

In Q1, the company delivered 25,768 vehicles, a 28.5% increase over the same quarter a year ago. Vehicle sales came in at about $1.46 billion last quarter, roughly a 25% YOY rise. This dynamic illustrates that the average selling price "ASP" was around $56,660 for each Nio vehicle. While NIO's cars are not cheap, demand should continue rising.

China's Massive Car Market

Welcome to the greatest car market on earth. Of course, I am talking about the China car market. Last year, a whopping 21.48 million passenger cars were sold in China, roughly a 6.5% YoY increase. Fortunately for NIO and other EV manufacturers, electric vehicles are huge in China.

EVs China(Insideevs.com)

More than 400,000 EVs were sold in China last month, about a 109% increase over last year. Moreover, nearly 300,000 EVs were battery electric vehicles ("BEVs"), accounting for almost one-quarter of the entire car market. China's EV growth story is massive, and NIO makes some of the best EVs. Therefore, despite NIO's relatively high sticker price, demand should remain robust for the company's vehicles.

NIO's Big Plans and International Potential

While most of the company's sales come from China, NIO plans to expand abroad. The companyis already present in Norway, with its complete charging infrastructure and battery swapping stations. In addition, Nio plans on entering Sweden, Germany, Denmark, and the Netherlands before the end of 2022. By 2025 NIO intends to be present in 25 countries and regions worldwide. Therefore, NIO will likely continue growing sales in China, Europe, and other areas, leading to significant revenue growth over a prolonged period.

The Valuation Perspective

NIO's valuation is approximately $40 billion. The company's TTM revenues are roughly$6 billion, and NIO delivered $5.67 billion in sales in 2021. 2022 consensus revenue estimates are for $8.9 billion. Therefore, NIO is trading at roughly 4.5 times this year's sales estimates.

Revenue estimates(SeekingAlpha.com)

However, if we look forward to 2023 consensus sales estimates ($14.54 billion), NIO is only trading at around 2.75 times forward sales. Let's also consider the company's extraordinary growth rate. NIO should deliver revenue growth of approximately 57%, despite COVID-19-related weakness. Next year's revenue growth should accelerate to around 63%. While 2024's revenue growth could decline to about 30-40%, Nio's growth story is remarkable, and 2.75 forward sales is a meager price to pay for this supercharged growth stock.

Here's what NIO's financials could look like in future years:

Source: The Author

We see that NIO's revenues should increase substantially in the coming years. Additionally, NIO's price-to-sales ratio is quite depressed right now. Many companies with much less growth trade at P/S multiples much higher than 2.75, or 5. For instance, Tesla (TSLA) trades at about seven times forward sales, and Lucid (LCID) trades at approximately ten times forward sales estimates.

Therefore, my projection for a 4-5 times forward sales multiple is relatively inexpensive for a hyper-growth company in NIO's position. Along with the company's revenue growth, we should see substantial increases in the company's market cap and share price. Due to the company's unique growth dynamic and future profitability potential, NIO's stock could hit $100 by 2025 or sooner, roughly a 355% gain from today's price.

• NIO's 1-year price target range: $40-55

Source: Seeking Alpha

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