Chinese luxury electric vehicle maker Nio stock (NYSE:NIO) has seen a strong rally in recent weeks, rising by about 45% since late August, roughly in line with its peers Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI). While broader market factors, such as the Chinese government’s recent monetary stimulus measures, have played a role in the recent rally, several factors specific to Nio have also contributed. We believe the stock could have meaningful upside, potentially rising 2x from current levels.
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Key trends working in Nio’s favor
Nio reported a relatively strong performance for September, with deliveries rising 35% year-over-year to 21,181 units. Although this growth was behind rivals like Xpeng, which delivered 21,352 vehicles (up 39.5% year-on-year), and Li Auto, which led with 53,709 deliveries, Nio has maintained a relatively consistent track record this year. The company has posted five consecutive months of over 20,000 vehicle deliveries, showing steady demand despite mounting competition.
Another key development for Nio has been the introduction of its more affordable sub-brand, Onvo, which began deliveries in September with 832 units sold. The Onvo L60, priced between RMB 200,000 ($28,000) and RMB 300,000 ($42,000), is expected to drive higher sales in the mass market as production scales up. Nio is also preparing to launch another brand called Firefly by the end of the year. Firefly’s first model, which will be a mix of small and compact SUV designs, will likely target even lower price points, expanding Nio’s presence further downmarket. The Chinese EV market continues to offer considerable growth opportunities. In September 2024, new energy vehicle (NEV) sales reached a record 1.3 million units, accounting for 46% of the 2.81 million vehicles sold in the country. This indicates a strong market for EVs, and with Nio’s premium lineup and more value-oriented brands like Onvo and Firefly, the company is well-positioned to address a larger market.
Despite facing pricing pressure from competitors like Tesla and Li Auto, which have been cutting prices, Nio’s margins have remained quite resilient. In Q2 2024, vehicle gross profit margins improved to 12.2%, up from 9.2% in Q1 and 6.2% in Q2 2023. This improvement was driven by higher delivery volumes and easing supply chain challenges, despite a 10% drop in average selling prices. Nio’s total revenue almost doubled year-over-year to $2.4 billion during the previous quarter, while net losses narrowed to $0.30 per share from $0.45 per share a year ago.
NIO Stock has had a poor run over recent years
Notably, NIO stock has performed worse than the broader market in each of the last three years. Returns for the stock were -35% in 2021, -69% in 2022, and -7% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period.
Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could NIO face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?
But Nio’s valuation is attractive
The stock trades at about $5 per share, about 1x consensus 2024 revenues, which is not expensive considering that revenues are projected to grow by over 20% this year and by over 35% next year. In comparison, Tesla trades at about 7x forward revenue, despite the fact the revenues are likely to remain almost flat this year. If Nio investors value that stock a bit more generously, at about 2x forward earnings, led by its stronger growth and improving margins, the stock could see a considerable upside. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Nio stock compares with its rivals Li and Xpeng.
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