Nio (NIO) released its much-anticipated earnings results after market hours on March 1, and with the company missing revenue and GAAP EPS estimates, it seems very likely that NIO stock could be headed lower.
However, any decline could be viewed as an opportunity to buy up stock from a medium to long-term investment perspective. There are several positives to consider despite a slight disappointment in headline numbers.
Before diving deeper into the Q4 2020 numbers, let’s briefly discuss the industry tailwinds. Last year, new energy vehicle sales in China comprised 5% of total car sales.
The country is targeting new energy vehicle sales at 20% of total car sales by FY2025 and closer to 50% by FY2035. The electric vehicle (EV) industry is therefore positioned to grow at a strong pace over the next decade.
Positive Catalysts From Q4 Results
At the beginning of FY2020, the biggest challenge for Nio was to secure financing for growth and to reduce cash burn. A year later, these headwinds have been addressed.
As of December 2020, Nio reported cash and equivalents (including short-term investments) of $6.5 billion. In addition, the company’s operating level loss narrowed to $142.7 million as of Q4 2020. It’s also worth noting that the company’s vehicle margin was 17.2% in Q4 2020, compared to a negative 6% in Q4 2019.
Clearly, the company’s performance has improved at an operating level with key reasons being cost cutting initiatives through FY2020 coupled with economies of scale. For Q1 2020, the company’s vehicle deliveries amounted to 3,838 and increased to 17,353 in Q4 2020.
As sales continue to grow, it’s very likely that Nio will achieve operating level profitability in the next few quarters. Another big positive is that Nio generated positive operating cash flows for Q4 2020 and FY2020. Ultimately, valuations boil down to the level of free cash flow a company can achieve. Once operating and free cash flows accelerate, NIO could be headed significantly higher.
Vehicle Delivery Growth Triggers
It’s important to mention the factors that will continue to boost vehicle deliveries. This will translate into top-line growth and cash flow upside.
An obvious trigger for vehicle delivery growth is positive industry tailwinds. Nio launched battery-as-a-service (BaaS) in August 2020 and this initiative will likely continue to boost vehicle deliveries. Consumers choosing BaaS (monthly battery pack subscription) are able to unlock significant discounts on the price of the car. It also opens up a new recurring revenue stream for the company.
Another key factor for Nio is international expansion. Nio plans to expand into Europe in the second half of the year. Despite the pandemic, EV sales in Europe surged 137% in FY2020. With presence in China and potential entry to Europe, Nio will have access to a big addressable market.
In Jan. 2021, Nio also launched its first flagship sedan, the ET7. The sedan will be equipped with Nio’s autonomous driving capabilities and is likely to attract consumer attention. The impact of the new launch on vehicle deliveries will be seen in FY2022.
Wall Street Analysts See Upside Potential In NIO
Consensus among Wall Street analysts on NIO is a Moderate Buy rating based on 7 Buys and 3 Holds. The average analyst price target of $68.26 implies that the stock is undervalued at current market prices, with approximately 64% upside potential over the next 12 months. Analysts’ price targets range from a high of $80.30 to a low of $54 a share. (See Nio stock analysis on TipRanks)
Concluding Views
Nio has forcasted vehicle deliveries of between 20,000 to 20,500 for Q1 2021. On a sequential basis, the company’s vehicle deliveries will therefore continue to increase.
If vehicle level margin and cash flow continue to improve, NIO is positioned to trend higher in the coming quarters. Importantly, as operating cash flows accelerate, the company could be internally funded for growth.
For now, it makes sense to stay on the sidelines. NIO might be attractive for fresh exposure around $40 levels.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
