NIO Inc. (NYSE: NIO) Stock: A Potential Growth Opportunity

Since my last update in mid-April, NIO shares have risen by 12.4%, slightly outperforming the market’s 10% increase. Despite Q1 2024 challenges, NIO’s improved margins and liquidity position suggest potential for growth and resilience in the competitive electric vehicle (EV) market. I maintain my “Buy” rating, as I believe the current gains are only a fraction of NIO’s potential.

Q1 2024 Financial Performance

NIO faced a tough Q1 2024, delivering 30,053 vehicles—a 3.2% YoY decrease. Vehicle sales were $1,160.8 million, down 9.1% YoY and 45.7% QoQ. Total revenue was $1,372.3 million, a 7.2% YoY and 42.1% QoQ decline. The primary reasons for these declines were lower average selling prices and a decrease in delivery volume, as explained by the management during the earnings call. Despite these declines, NIO’s margins improved:

• Vehicle margin rose to 9.2% from 5.1% YoY, though down from 11.9% in Q4 2023.
• Gross profit margin increased to 4.9% from 1.5% YoY, although it decreased from 7.5% in Q4 2023.

Operating losses for Q1 2024 were $747.1 million, a 5.5% YoY increase but an 18.6% decrease from Q4 2023, indicating a successful reduction in quarterly loss by nearly $140 million or over 15% on an adjusted basis.

Liquidity and Financial Position

NIO’s improved liquidity is a positive aspect:

• The company received a strategic investment of RMB 1.5 billion to develop core technologies and expand its charging and swapping network.
• As of March 2024, NIO had RMB 45.3 billion ($6.3 billion) in cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits.
• The ratio of all liquid funds and short-term investments to market capitalization is now above 57%, the highest in the company’s public history.

This enhanced liquidity, coupled with stabilized EBITDA, suggests that NIO can sustain operations without additional cash injections, thus avoiding shareholder dilution.

Operational Developments and Market Expansion

NIO continues to grow and develop, with gradual improvements in vehicle deliveries:

• The company delivered 15,620 vehicles in April and 20,544 vehicles in May, gaining market share in the premium BEV segment.
• In April 2024, NIO launched the ET7 at the Beijing Auto Show, targeting high-end competitors like BMW 5 Series, Audi A6, and Mercedes E-Class.
• The NOP Plus urban driving feature now covers over 1.4 million kilometers of Chinese highways and city streets, used by over 260,000 users.

NIO also established ONVO, a new brand targeting the mainstream family car market, with the initial product, L60, set for delivery in September 2024. The company continues to expand its sales network and service capacity, with 154 NIO houses, 388 NIO bases, 344 service centers, and 2,472 power swap stations globally.

Valuation and Price Target

Based on the improved liquidity and operational developments, I believe NIO stock is undervalued. The cash-to-market cap ratio is above 57%, suggesting potential for significant price appreciation. I see a possible reversal to the 200-day moving average in the $6.2-6.3 range, implying a price target of 30-35%.

Conclusion

NIO’s financial results for Q1 2024 revealed challenges but also significant improvements in margins and liquidity. The company’s continued expansion and strategic initiatives position it for potential growth and resilience in the competitive EV market. Given the current undervaluation and potential for significant price appreciation, I reiterate my “Buy” rating.

Risks to the Thesis

Several risks could impact NIO’s performance:

• The European Union’s high tariffs on Chinese EVs could affect NIO’s profitability and market penetration in Europe.
• NIO is still in its growth stage, with revenue stagnation due to pressure on average selling prices, making profitability challenging in the near term.
• The company’s valuation based on price-to-sales ratio appears slightly elevated for the Consumer Discretionary sector, posing a risk if market sentiment shifts.

Despite these risks, NIO’s improved financial position and strategic initiatives support a bullish outlook.