NIO (NYSE: NIO) Justifies Recent Rally

Electric vehicle maker NIO (NYSE: NIO) has had a nice rally in recent weeks, with shares moving up as much as 70% from their post-pandemic lows of last month. There’s still a lot of ground to cover before they’re back at last year’s all time high, but at least they’re moving in the right direction. Investors and those of us considering getting involved got a fresh look under the hood this week as they released their Q1 earnings, and there’s plenty of food for thought.

Top line revenue was ahead of what analysts were expecting and up more than 24% on the year, while earnings per share also beat the consensus. Deliveries of vehicles were 25,768 in the quarter, representing an increase of 28.5% year over year and an increase of 2.9% quarter on quarter. Looking ahead, the company’s revenue growth is expected to pick up momentum heading into the rest of the year, with Q2 revenue forecasted to show 37% year on year growth. 

Still, shares fell in the aftermath of yesterday morning’s release, and were down 8% on the day. They were flat in Friday’s pre-market session so investors will be hoping they can at least consolidate into the weekend. The main concern for the poor response seemed to be around NIO’s projections for Q2 deliveries, which came in between 23,000-25,000, and would represent a decline on the 25,768 delivered in Q1. 

Bullish Comments

But William Bin Li, founder and CEO of NIO, still struck a bullish tone with results. He said "we set new record-high quarterly deliveries of 25,768 vehicles in the first quarter of 2022, and hit the milestone of exceeding 200,000 vehicle deliveries in May within four years since our first delivery. Despite the volatilities of supply chain and the challenges in vehicle delivery resulting from the recent COVID-19 resurgence, we witnessed robust demand for our complementary products and achieved an all-time high order inflow in May 2022. On April 29, 2022, the first batch of tooling trial builds of the ET5 rolled off the production line at the new manufacturing plant at NeoPark in Hefei. We expect to start delivery of the ET5 in September 2022. In addition, we will further enhance our product offering by introducing the ES7, a new mid-to-large five-seater SUV based on NIO Technology 2.0 (NT2.0), in June and expect to start its delivery in late August," concluded Li. 

The post-earnings dip might well be considered a buying opportunity for those looking to add some exposure to the electric vehicle market. It was only two weeks ago that the team at Morgan Stanley reiterated their Overweight rating on NIO shares, as well as their $34 price target. Even with the recent rally, and notwithstanding yesterday’s dip, that still suggests there’s upside of some 80% to be had from where shares closed on Thursday. 

Analyst Tim Hsiao said at the time that “the associated production disruption also adversely affects the ramp-up/launch of NIO's new models and aggravates the market's concerns over NIO's sales momentum. With gradual reopening in the Yangtze River Delta region as well as the Rmb10k subsidy provided by the Shanghai government to consumers to replace old cars with electric cars, we believe NIO is well-positioned to capitalize on such local stimulus programs and resume sales momentum in the upcoming months."

Considering A Position

The bullish stance echoed that of Bank of America, who in the middle of last month upgraded their rating on NIO stock on the expectation that a higher sales level will lead to better margins in the second half of 2022 and with negative factors seen already priced in. Analyst Ming Hsun Lee said at the time that key catalysts for NIO “include a strong model cycle and order backlog, the ability for the electric vehicle maker to pass on costs through price hikes, a normalization in the supply chain and less ADR concerns with new exchange listings.”

This is all good stuff for those of us with a long term investment horizon to be hearing. Revenue growth is accelerating, and gross margins are improving. Like many companies out there, NIO is still feeling the effects of supply chain issues, but as these clear up in the coming months, the main headwinds should dissipate.