NIO Stock Down 34% in 2022– Time to Buy NIO Stock?

2022 has been a tough year for growth stocks and EV (electric vehicle) stocks have particularly looked weak. NIO stock is down almost 34% in 2022 and now trades at a third of its all-time highs that it had hit in the first quarter of 2021.

NIO is among the most volatile EV stock. It had tumbled in the first quarter of 2020 and there were fears over its very survival. The company was finding it hard to run its cash-burning operations. However, it soon managed to get investments from strategic investors which helped turn around the sentiments.

EV stocks have been quite volatile

The company also posted strong operational results in the year and its gross margins expanded significantly. Eventually, NIO was among the best performing EV stocks of 2020 and ended the year with gains in excess of 1,100%.

NIO stock went to an all-time high of $66.99 in early 2021 amid the surge in EV stocks. However, soon the sector came under pressure amid the sell-off in growth names. Also, investors started to question the high valuations of green energy companies. NIO stock tumbled in 2021. Just as it outperformed EV stocks by a wide margin in 2020, it underperformed badly in 2021. Tesla was among the rare EV companies that outperformed in both 2020 and 2021. However, even it has looked weak in 2022.

NIO stock is now trading near multi-month low price levels. What’s the forecast for the stock and should you buy the dip in the Chinese EV company?

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NIO stock recent developments

NIO has said that it would list in Hong Kong, following the footsteps of fellow Chinese EV companies like Xpeng Motors and Li Auto. In its filings with the Hong Kong stock exchange, NIO said, “Based on the foregoing and as advised by our PRC Legal Adviser [Han Kun Law Offices], we are of the view that the Cybersecurity Review Measures will not have a material adverse effect on our business, financial condition, operating results and prospects.”

Chinese stocks

Meanwhile, more than any regulatory risk in China, NIO’s secondary listing in Hong Kong is more of a move to offset the risk of delisting in the US. Like fellow Chinese companies, it also faces the risk of delisting in the US. It also went public in the US through the VIE (variable interest entity), a practice that now both China and the US are tightening the screws on.

Notably, NIO did not make any mention of the regulatory risks from the feared delisting in the US. It would also not be raising any fresh capital as part of the listing. This is unlike Xpeng Motors which not only raised over $2 billion from the Hong Kong listing but also categorically listed US-China tensions as among the reasons for listing in Hong Kong.

NIO earnings are expected this week

NIO is scheduled to release its fourth-quarter earnings this week. Notably, Tesla stock had plummeted after it released its fourth-quarter earnings. While the company posted better than expected earnings in the quarter, it delayed the launch of new vehicles to 2023 citing the chip shortage situation. The Elon Musk-run company wants to focus on the production of existing vehicles rather than new models amid the global chip shortage.

Analysts expect NIO to report revenues of $1.54 billion in the fourth quarter, a YoY rise of 46.9%. It is expected to post an adjusted loss per share of 12 cents in the quarter. While NIO’s gross profit margins have expanded and are in double digits, it is still posting losses. That said, even Tesla was profitable in only a handful of quarters until Q3 2019. That quarter, Tesla reported a surprise profit and has since been profitable in all the quarters.

Delivery report

NIO has been among the worst affected Chinese EV company by the chip shortage. In 2021, it delivered 91,429 cars, which was below what Xpeng Motors had delivered. The deliveries were only slightly ahead of Li Auto. The delivery performance is also reflected in these companies’ stock prices and NIO underperformed fellow Chinese EV stocks in 2021.

NIO stock forecast

Wall Street analysts are bullish on NIO stock and it has a median target price of $52.98 which is a premium of 153% over current prices. Its street high target price is $88 which is a premium of 320% over current prices. Of the 27 analysts covering the stock 23 rate them as a buy while three analysts have a hold rating. Only one analyst has rated the stock as a sell or some equivalent.

Morgan Stanley is bullish

In December, Morgan Stanley had advised buying the dip in the stock saying that it expects it to rebound in 2022. “The stock has lagged peers YTD as growth stalled on the component crunch, plant restructuring and no new products. However, it’s time to turn the page — a superior ecosystem, broadening customer and distinct branding make the setup unique and favorable for NIO to gather strength into 2022,” said Morgan Stanley in its note.

NIO stock long term forecast

Earlier this month, Barclays initiated coverage on NIO with a buy rating and a $34 target price. It said, “We believe that the rapid adoption of EVs around the world and booming EV sales have presented China’s EV makers a rare opportunity to not only take a sizable market share of the domestic auto market – the largest in the world with about 25-30% global share by units sold per annum – but also build a dominant position on the world stage,” said Barclays analyst Jiong Shao.

The long-term outlook for NIO stock looks positive. The company is coming up with two new sedans this year and is also expanding into newer markets. These efforts would drive the long-term value for NIO. Also, the company is expected to gradually improve its earnings and eventually turn sustainably profitable like Tesla.

Should you buy NIO stock?

NIO is among the most promising Chinese EV stock and has built a niche for itself in the premium EV market. The company’s BaaS (batter-as-a-service) is another differentiator and helps it lower the initial buying price for its cars.

The outlook for Chinese EV stocks in general looks positive looking at the impetus that the government has placed on the sector. The Chinese government sees electric cars as a strategic industry and the sector forms part of its “Make in China 2025” program.

NIO stock now trades at an NTM (next-12 months) EV-to-sales multiple of 3.8x which looks tempting. While there are risks that NIO faces, at these price levels the risk-reward looks quite attractive.

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