Take a Peek at NIO Before Its Comeback
Chinese electric vehicle giant NIO Inc.'s (NYSE:NIO) underwhelming first-quarter production was severely impacted by a multitude of factors, including limited factory output, holidays and Covid-19 shutdowns. In June, though, it experienced a massive bump in deliveries with its factories returning online and robust demand for its first sedan product, the ET7. Hence, a recovery in its delivery volumes is likely to drive an upwards revaluation for the stock.
NIO went public in 2018 in the U.S., and within a couple of years, it became a Wall Street darling. It posted a mind-boggling return of over 1,110% in 2020, with EV sales booming in China. Fast-forward to 2022, the stock is trading at just one-third of its all-time high.
Nevertheless, the company is trying its best to convince investors it has massive growth potential with new launches and entry into new markets. Considering its solid track record, I expect NIO to overcome its troubles and return to winning ways over the long term.
Encouraging June deliveries update
NIO's deliveries and operating results have fluctuated over the past several months. The company is facing intense cost and supply constraints that continue hurting EV makers. However, most of its troubles are on the supply side and have little to do with demand.
The company posted its delivery card for June, a handsome improvement from previous months. It delivered 12,961 vehicles, which equates to a 60.3% increase on a year-over-year basis. Additionally, its deliveries soared over 80% sequentially.
Its upcoming ET5 sedan and ES7 SUV will start contributing to its revenue base in the second half of 2022. Moreover, the ET7 continues to gain strong traction in the Chinese market. Hence, I expect NIO to wrap up another incredible year despite the crippling headwinds it faces at this time.
It has also forayed into the European market and is close to launching an affordable mass-market brand by 2024. Its expansion into Europe could be huge, considering its position in the Chinese EV market. Targeting such a mass market will pay plenty of dividends down the road.
The road ahead
NIO's valuation is more attractive than ever. During the pandemic, its shares soared to as high as $65. However, late investors are more concerned over delivery prospects, which is understandable considering how the market slowed down during the first quarter. The company currently trades at roughly 5.50 times trailing 12-month sales while its five-year average is at over 11.50 times. Moreover, despite the short-term setbacks, the EV giant's long-term growth prospects remain highly attractive.
Perhaps the biggest risk for NIO is its short-term delivery pattern, making it hard to predict its delivery potential with accuracy. Additionally, the coronavirus pandemic still remains a threat to EV manufacturers, so the macroeconomic headwinds are likely to weigh in on its upcoming reports.
Nonetheless, China's EV market has been growing by double-digit margins each month and NIO remains a major player. That alone adds immense value to its long-term case. The stock is not free from volatility, and being a foreign company itself is a remarkably risky proposition. However, it has established its footprint in the world's EV market and has plenty of growth prospects ahead of it.
The bottom line
NIO's stock has taken quite a hammering over the past several months. It faces multiple headwinds that have weighed down its business performance.
However, its June delivery report shows it is back where it belongs. Additionally, with a couple of new models being released in the coming months and its move into Europe, expect a strong bump in its top line. There are risks with investing in NIO, but overall it could be an incredible long-term play.
This article first appeared on GuruFocus.
