Is NIO the Best Chinese EV Stock to Buy Now?

Shares of Nio Inc (NIO) have whipsawed over the last couple of years. The Shanghai-based seller of electric vehicles (EVs) survived a bankruptcy scare in 2020, and NIO went on to rise over 1,100% that year - but fell sharply in both 2021 and 2022. 

NIO has gained over 35% so far in 2023, but its year-to-date returns significantly trail those of fellow Chinese EV peers like Xpeng Motors (XPEV) and Li Auto (LI), as well as American-based Tesla (TSLA) - which is the largest seller of battery electric vehicles (BEVs) globally. Now, with NIO on the rebound from its long-term underperformance - but still 79% below its all-time highs, set in February 2021 - I believe the stock could be a good buy at these levels.

Why NIO Has Underperformed Other EV Stocks

NIO hasn’t done well over the last two years for multiple reasons – which include both macro as well as company-specific factors.

First, Chinese stocks in general have underperformed over the last couple of years. In 2021, China’s tech crackdown spooked investors while the country’s zero-COVID policy scared away investors last year. While the country ditched its zero-COVID policy late last year, the rebound in its economy has generally been much slower than expected, which has led to pessimism towards Chinese stocks. The Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR), which is a good proxy for large-cap Chinese stocks, is down almost 2% for the year, even as U.S. stocks have rebounded in 2023.

The EV price war in China is not helping matters. After previously saying that it won’t join the Tesla-initiated price war, NIO ultimately lowered car prices in June. China’s automotive association has attempted to broker a truce in the price war, but subsequently retracted the pricing pledge over antitrust concerns. Given its business model as a seller of EVs, not a manufacturer, NIO may be more vulnerable than some of its peers to the ongoing EV price battle.

At the same time, investors have grown wary of perennially unprofitable companies, and industries like EVs have seen a deterioration in their valuation multiples. Also, growth stocks like NIO have lost some of their sheen now that the Fed has raised interest rates to the highest level since 2001.

Digging deeper, NIO’s operating and financial performance has also been far from impressive. It delivered 23,520 vehicles in the second quarter of 2023, down from 25,059 deliveries in the corresponding period last year. More troubling, NIO's gross margin in the first quarter of 2023 was only 1.5% - a fraction of the 14.6% reported in the corresponding quarter in 2022. Similarly, its net loss in Q1 2023 was almost $690 million, more than doubling its year-ago loss.

Having said all this, I believe that the worst is over for NIO, and the stock offers a good entry point at these price levels.

NIO Stock Looks Like a Good Buy Now: Here's Why

The macro environment in China has improved, and the government has pivoted from its notorious tech crackdown. China views its EV industry as a futuristic and strategic segment of its economy, and even bailed out NIO in 2020 as it faced a survival battle. In a sign that it continues to support the industry, China has extended the EV tax break until 2027.

NIO also has a reasonably strong balance sheet, and held $5.5 billion in cash and cash equivalents at the end of March. Meanwhile, some of the smaller EV names are struggling to raise money, and Lordstown Motors (RIDEQ) filed for bankruptcy after failing to get funding from Foxconn. NIO is still popular with investors, though, and recently secured funding of $738.5 million from CYVN Holdings, which is majority owned by the Abu Dhabi government.

NIO has also expanded its product portfolio and launched the ET5 Touring last month. A diversified product portfolio should help the company expand its market share. The company's financial performance is also expected to improve in the coming months as it ramps up deliveries and explores more overseas markets to sell its vehicles.

Specifically, analysts expect NIO's revenues to rise 34.8% and 47.5% year-over-year in 2023 and 2024, respectively, and the consensus forecast calls for its net loss to be cut in half by next year.

From a valuation perspective, NIO trades at a forward price-to-sales multiple of 2.41x. In contrast, Li Auto and Xpeng Motors trade at multiples of 2.48x and 3.05x, respectively. (The corresponding multiple for Tesla is 7.23x - but that’s because it is sustainably profitable and generates free cash flows, unlike startup EV companies that continue to burn cash every quarter.) That said, as NIO's financial and operating performance improves, I believe its valuation multiples will inch up toward those of its Chinese EV peers.

NIO Stock Forecast: Analysts Call It a Buy

Wall Street analysts rate NIO stock as a Moderate Buy:

Of the 10 analysts covering NIO, 4 rate it as a Strong Buy, while 1 maintains a Moderate Buy. The remaining 5 analysts rate it as a Hold. While NIO has run ahead of its mean target price of $12.26, its Street-high target price of $21 is a premium of 58% over current prices.

Earlier this month, Morgan Stanley reiterated its overweight rating on NIO and said that it believes “laggards” like NIO will play catch-up with other EV names.

The next key trigger for NIO will be its July delivery report, scheduled for early next week. This will be followed by its Q2 earnings release, where NIO may offer more insight on its production ramp-up and the EV price war - which might only escalate in the coming months. 

Overall, I believe that an improvement in earnings and expansion of valuation multiples could support the next leg of rally in NIO, particularly as market sentiment towards Chinese stocks continue to improve.