Stocks to buy

Nio (NYSE:NIO) stock had touched a closing high of $62.80 back in February. However, the renewed upside in the stock failed to sustain and the stock has slipped again to current levels of below $39.

Source: xiaorui /

A key reason for the stock correction is China’s crackdown on technology companies.

The regulatory scenario is likely to remain challenging with China signaling that more regulations are due over the next five years.

However, I believe that there are undue concerns related to the electric vehicle industry. The correction is therefore a good opportunity to accumulate Nio stock.

There are two key reasons for this view. First and foremost, the regulations are targeted towards the technology sector. It’s unlikely to have a meaningful impact on electric vehicle companies.

Furthermore, the Chinese government has set an ambitious target of 20% of new cars sold to be EVs by 2025.

BYD founder Wang Chuanfu further believes that new energy vehicles will account for 70% of new car sales by 2030. It’s unlikely that the government will impose regulations that impact growth for electric vehicle companies.

The correction in Nio stock, therefore, presents a good accumulation opportunity. I believe that the company is among the electric vehicle names in China that are positioned to survive competition and grow.

Business Developments Remain Positive

Nio recently reported results for the second quarter of 2021. There are several positive developments to talk about and underscore the view that Nio stock is attractive.

For Q2 2021, Nio reported vehicle deliveries of 21,896 as compared to 10,331 in Q2 2020. Even on a quarter-on-quarter basis, the company’s vehicle deliveries have been trending higher.

An important point to note is that the company’s vehicle margin was 20.3% in Q2 2021. In the prior year, its vehicle margin was 9.7%. With healthy growth in vehicle deliveries, margin improvement can potentially sustain.

On the flip-side, the company reported an operating level loss of $118.2 million for the quarter. It’s worth noting that the company’s research and development expense was $136.9 million.

With high investments in research and marketing, I would not be worried in the near term about operating level losses.

For June 2021, Nio reported cash and equivalents of $7.5 billion. Therefore, there is ample financial flexibility for aggressive investments.

In terms of sustained growth in vehicle deliveries, there are two points to note.

First, Nio is targeting three new products based on the NIO Technology Platform 2.0 in 2022. This includes ET7, which is a premium electric sedan. New models will ensure that vehicle deliveries remain robust.

Second, Nio expects to start delivering its electric vehicles in Europe in 2021. Norway is likely to be the first market. Broader expansion in Europe is on the cards in the next few years. Therefore, as the addressable market expands, there is clear growth visibility.

Even with these positives, there might be a relative slowdown in vehicle deliveries in the second half of 2021. The delta variant outbreak and the Henan floods are the negative factors. However, weakness in the stock due to these temporary headwinds is a buying opportunity.

Concluding Views

For Q3 2021, Nio has guided for vehicle deliveries in the range of 23,000 to 25,000. This would imply healthy top-line growth and possible improvement in margins.

Over the long term, Nio’s battery-swap program is likely to be a key differentiating factor. The company plans to have over 4,000 swap stations globally by 2025. The company’s initiative of battery-as-a-service has also accelerated sales growth as it lowers the down payment for consumers.

With global expansion plans, a ramp-up in manufacturing and an attractive product line-up, Nio stock is worth holding for the long term.

In terms of risk, the factor of intense competition is offset by the point that the market remains significantly underpenetrated. Nio has emerged well from a balance sheet crisis, and I don’t see any financial concerns.

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

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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