Nio is Showing Investors Why Two Contrary Things Can be True

Chris Markoch

Thu, Mar 31, 2022, 6:32 PM 4 min read

Investors are looking for undervalued stocks wherever they can find them. And they’re also looking for reasons to buy some of the high growth stocks of the past year at a steep discount. Nio looks like the latter. And yet, with supply chain issues still in place, there is a possibility that the company may miss on delivery estimates in the next two quarters. That makes NIO stock a buy only for long-term investors at this time.

Guidance is the watch word this earnings season. And so it was that NIO stock dropped largely after earnings because it’s guidance for revenue and delivery was lower than analysts expected.

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However, that’s been the same story for many companies this earnings season. And since the post earnings dip, Nio has recovered nearly all those losses as of this writing.

NIO

Nio

$20.98

Executing the Plan Will Be the Key

Nio has ambitious expansion plans in 2022. These plans include three new models as well as expanding into several countries in Europe.

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On the product front, Nio just started delivering its ET7 sedan. It began taking orders for its midsize sedan, the ET5 in December and is forecasting deliveries to begin in September. Nio is also expecting to start delivering the company’s first SUV, the ES7 in the third quarter. However, that model has yet to be unveiled.

Nio is also planning to expand into Germany, Denmark, Sweden and the Netherlands. Europe is the number one market of battery-powered EV vehicles so it makes sense for this to be the first market for Nio to expand into outside of its home country.

Headwinds May be Present

Nio is headquartered in Shanghai. And as investors are aware, that city was in the most extensive lockdown in two years. To be clear, Nio does not have manufacturing facilities in Shanghai. It’s primary manufacturing facility in China is in the city of Hefei. However, the lockdown is a stark reminder that companies, particularly those operating in China with its Covid-19 zero policy, may not be through dealing with Covid-related delays.

And the company is still likely to be dealing with supply chain delays that could (emphasis mine) cause production delays. On the company’s earnings call, management felt confident in the company’s current supplier arrangements for both batteries and semiconductor chips.

However, Tim Hsiao, an analyst at Morgan Stanley (NYSE:MS) was not as confident. In lowering his price target for NIO stock from $66 to $34, the analyst cited supply chain disruption and geopolitical conflict among other factors.

With NIO Stock Two Things Can Be True

In summary, there are many reasons to be optimistic that NIO stock may be getting ready to launch off its current base. The company has some ambitious delivery targets. If they hit them, NIO stock could jump significantly.

But it won’t take much to disappoint investors. Nio is not expected to be profitable until late in 2023 at the earliest and although the company was free cash flow positive at the end of 2021, it went back to the negative in the latest quarter. Nevertheless, it could be the time for investors to take a small position or add to their position in the EV company.

With that said, I don’t believe we’ll see NIO stock back at its all-time high anytime soon. Analysts have a consensus price target of $50.28 which would be a 135% gain for the stock. Yet, that would still be about 10% shy of is all-time high.

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.