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What’s the limit for Nio’s share price?

It’s difficult to ignore the sharp acceleration in Nio’s [NIO] share price. Since the start of 2020, Nio’s share price has soared 651.6% (as of 20 October’s close). The luxury Chinese electric car manufacturer has ramped up production and moves — it hopes — toward profitability. So, what’s next for Nio — is the stock overbought, or is there plenty of juice left?

 

 

What’s happening with Nio’s share price?

Nio, sometimes referred to as ‘the Tesla of China’, has been on the comeback trail this year, following serious cash flow issues in 2019. Reports suggested the company had lost as much as $6bn and was almost bankrupt. Nio’s share price fell to its nadir of $1.36 on 30 October last year, a drop of 77.3% from its US IPO in September 2018.

Vital aid was on the way, however, in the shape of a $1bn cash injection from Chinese government-backed investors. Nio also received funding from private investors, including Chinese technology conglomerate Tencent [TCEHY], which took its position in Nio to 16.3% in July. Heading into June, Nio’s share price was just below $4, but it was about to shift through the gears, rising 615% in just four and a half months.

The good news doesn’t end there. Nio’s share price jumped 22.57% from its previous close of $21.62 to finish at $26.50 last Wednesday, after broker JPMorgan upgraded its rating on the stock from Neutral to Overweight, and upped its price target from $14 to $40. Nio’s share price leapt 32.65% on the week, closing at an all-time high of $28.48.


 
Positive sector outlook

JPMorgan’s Nio analyst, Nick Lai, issued a positive outlook on the Chinese energy vehicle (EV) sector, claiming market penetration is set to increase from less than 5% in 2019, to 20% in 2025. Lai reckons customers will increasingly shift from traditional internal-combustion engines (ICE) to EVs, with cost-parity between these vehicle types achievable by 2023, as battery costs drop further.

“China is witnessing ‘a rising tide lifts all boats’ phenomenon, which is not only leading to a fast-growing new energy vehicle (NEV) addressable market, but also benefiting suppliers relevant to the broader EV supply chain”, Lai was reported as saying by Yahoo Finance.

 

“China is witnessing ‘a rising tide lifts all boats’ phenomenon, which is not only leading to a fast-growing new energy vehicle (NEV) addressable market, but also benefiting suppliers relevant to the broader EV supply chain” - Nick Lai, analyst at JPMorgan

 

Lai also points out that Nio’s share price will benefit from the extension of China’s NEV government subsidy programme until 2022, which will cover its battery-swap business model.


 
New model launched as production ramps up

Nio has also boosted production, officially launching its EC6, a 5-seater premium electric coupe SUV, in December 2019, with deliveries starting last month. In its most recent delivery update earlier this month, Nio set a string of production records, as it continues to increase output.

Nio confirmed delivery of 4,708 vehicles in September, a new monthly record, and a 133.2% year-on-year increase. In Q3, Nio delivered 12,206 vehicles, representing a year-on-year increase of 154.3%, and exceeding the upper end of its own guidance. As of 30 September, cumulative deliveries of the ES8, ES6 and EC6 reached 58,288 vehicles, of which 26,375 were delivered in 2020.

 

4,708vehicles

delivered by Nio in September 2020

 

Nio will earn an estimated 7% market share in the passenger EV market by 2025, and a 30% share in the premium space which it focuses on, according to Lai, leading him to conclude that "Nio remains attractive from a long-term perspective.”

Solid third-quarter results are anticipated next month, with Lai predicting Q3 gross profit margin to expand from 8% in the second quarter to 12%. Lai also highlights a robust order backlog, particularly for the new EC6, while a new sedan model should further enhance its product range.


 
Where next for Nio’s share price?

With JPMorgan’s positive note following upgrades from fellow brokers UBS and Morgan Stanley in August, the outlook certainly looks brighter for Nio. Of eight analysts following the stock on Yahoo Finance, five rate it a Hold, with two Buys and one Strong Buy recommendation. 

The average price target stands at $18.38, with a low price of $6.51 and a high of $33.25. While the average target represents a 35% downside from last week’s close, perhaps the recent Nio share price surge has caught analysts by surprise. If it can reassure with solid Q3 numbers next month, we may see a shift in the analysts’ consensus price target.

 

Market Cap$34.062bn
EPS (TTM)-44.10
Quarterly Revenue Growth (YoY)146.5%

Nio's share price vitals, Yahoo Finance, 22 October 2020

 

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