NIO’s Position In EV Market Should Not Be Overlooked

Nikola May Not Be The Next Tesla

The EV market has been heating up this year and most of the blame can be laid on Tesla (NASDAQ:TSLA). Shares of the stock have been hyped up to astronomical levels leaving the market wondering just what the true value is. That's not a good thing, not for investors adverse to volatility. Tesla’s position as the leading EV manufacturer worldwide is safe, don’t get me wrong, but it’s a big market and there are other contenders for market share.

Nikola (NASDAQ:NKLA) grabbed investors’ attention last week when it announced the deal with GM (NYSE:GM). That news has the company set up to begin mass-producing vehicles and bring a challenge to Ford (NYSE:F), but that’s still a long way off. And there is still the whole short-selling issue to contend with. Until then there are other EV companies in production now, on a path to profit, and ready to see their shares rip higher.

Triple-Digit Growth And Profits In Sight For NIO

NIO Limited (NYSE:NIO) is a Chinese-based manufacturer of EV vehicles with astronomical growth in the forecast. The company is on track for high double-digit gains in 2020 and nearly the same in 2021. Right now, the consensus for 2020 is revenue growth in the range of 90% with a slight slow down to 72% next year.

If the 2nd quarter results are any indication, the consensus targets for both 2020 and 2021 are too low. The 2nd quarter revenue grew 146.5% and 500 basis points above the consensus target. The consensus for 3rd quarter is running near 135% but, based on momentum in the Chinese auto market, likely to be beaten. The August data has sales of Chinese vehicles up nearly 9% on a YOY basis with a notable expansion of the EV market.

The 2nd quarter results also put the company on track to produce profits sometime in the next year. The ramp in production over the past year has helped the company achieve expected economies of scale and positive margins. The company’s gross margin rose to 8.4% from -32% in the prior years quarter while vehicle margin topped 9.7%, up from the previous -24%. The company is still projected to produce slight losses over the next two years but I suspect that consensus will change over the next quarter.

“In August, we achieved our best-ever monthly performance on both deliveries and order growth,” said William Bin Li, founder, chairman, and chief executive officer of NIO. “As we continue to improve the production capacity for all NIO products, our monthly capacity will reach 5,000 units in September to support our future deliveries. With the closing of our recently announced ADS offering, we have further enhanced our balance sheet and optimized our capital structure to be better prepared for the acceleration of our core technology development, autonomous driving in particular, and the global market expansion in the future.”

The Analysts Are Warming Up To EV-Maker NIO

The analysts are generally bullish on NIO but the sentiment is not shared universally among them. Of the 14 ratings, 6 are still neutral and there is even 1 bear. The consensus price target is near $14 or about 20% downside from current price action but that too will change soon. Deutsche Bank is the latest sell-sider to issue a rating and that was bullish. Deutsche Bank started NIO with a buy-rating calling it the leader of China’s Fab Four EV Automakers. They set an almost-Wall Street high-price target of $24. Credit Suisse has the highest target, $25 or 33% upside.

The Technical Outlook: Earnings Are Driving NIO Higher

NIO share prices have been on a tear gaining more than 400% since the first of the year. The drive is due in part to rising earnings and improving outlook, and in part to the recently completed offering of U.S. depository shares that should provide a dual tailwind for the foreseeable future.

Most recently, shares of NIO have been in consolidation below the all-time high. Support appears to be strong at the short-term moving average so the rally should eventually continue higher. The indicators are both bullish and rolling into a strong buy-signal so I am optimistic the bulls will soon push prices higher. The risk is resistance at the $21 level, a firm move above that level would be a trigger to buy.