Investing.com — Despite NIO Inc (NYSE:) (HK:) shares plummeting 50% year to date, Wall Street analysts are becoming increasingly bullish on the company’s prospects.
Both Jefferies and Citi Research have expressed confidence in NIO’s ability to recover, pointing to a series of upcoming catalysts that could help propel the stock back up.
These include improving financial performance, a promising new model pipeline, growing sales volumes and favorable industry conditions in China’s rapidly expanding new energy vehicle (NEV) market.
While risks remain, both brokerages believe NIO’s current stock price represents an attractive opportunity for long-term investors.
The main factor behind the renewed optimism surrounding Nio is the planned launch of the L60 model on September 20, 2024, which is already generating positive feedback.
Jefferies analysts see the launch as a major short-term catalyst and said they “estimate the likelihood of this scenario to be around 70-80% (or ‘very high’).”
This is expected to be driven by strong demand for the L60 combined with broader improvements in the NEV sector.
Meanwhile, Citi Research points out that NIO’s improving financial performance is the main reason for the company’s recovery.
“We expect other revenue to be RMB1.86 billion in 3Q24, with gross profit margin shrinking to -9.5% (-12.3% in 2Q24),” analysts at Citi Research said.
Additionally, Citi expects blended average selling prices (ASPs) to increase 1% to 2% sequentially due to reduced incentives, improved product mix and scale efficiencies.
These factors should increase vehicle GPM to 13.3%-13.7% and improve overall blend GPM to 11.5%.
Both Jefferies and Citi expect NIO’s sales to grow significantly in the coming quarters.
“We expect fourth-quarter sales to continue to improve to 83,000-85,000 units, up 32-39 percent from the previous quarter,” Citi analysts said.
“We expect NIO to later set a sales target of 400,000 to 450,000 units by 2025,” Citi added.
Jefferies supports this view, noting that NIO is well positioned to benefit from favorable policies and market trends as China continues to drive electric vehicle adoption.
The brokerages believe NIO’s expanding product portfolio, including the L60 and other upcoming models, will enable the company to gain market share from its joint venture (JV) brands and competitors such as Xpeng (NYSE:).
As the industry bottoms out, NIO’s strategic positioning in the NEV market should enable it to capitalize on growing demand, especially in China, where government policies are driving a shift toward sustainable transportation.
Both Jefferies and Citi see NIO’s current share price as an opportunity, with Citi highlighting that NIO is trading at a 30-40% discount to its expected 2025 price-to-sales multiple compared to Xpeng, creating a potential arbitrage opportunity.
Citi expects industry tailwinds and Nio’s improving financial performance to narrow the valuation gap between Nio and Xpeng in 2024 and 2025. Citi set a US$7.00 target price for Nio’s U.S. shares, based on a projected 2024 P/S multiple of 1.4x, in line with the one-year average.
Similarly, Jefferies is using a probability-weighted valuation methodology that factors in NIO’s expected volume growth and long-term potential. Jefferies assigns probabilities of 25%/50%/25% to bull, base and bear scenarios, respectively, and expects net income to breakeven by 2028 in the base case.
The brokerage’s valuation model uses a weighted average cost of capital (WACC) of 18.7%, reflecting NIO’s risk profile with a beta of 2.4 and a long-term growth rate of 3.0%.
The two brokerages emphasized that NIO’s valuation has become more attractive after declining since the start of the year, making it an attractive option for investors looking to take advantage of the company’s growth potential.
As the broader NEV market continues to expand, Nio currently offers an attractive entry price and is positioned to be a major beneficiary.
Despite Nio’s optimistic outlook, both Jefferies and Citi outlined several risks that could affect the company’s performance.
These include possible operational delays as production scales up, increased competition from both existing automakers and new entrants, and weaker-than-expected demand for NIO’s vehicles.
Additionally, a deterioration in NIO’s working capital position could result in funding risks, but Citi believes that the company will not need to refinance in the near term given its expected improving earnings.
Another risk is product quality: Any problems with the design, reliability or service of NIO’s vehicles could damage the company’s reputation and hinder sales growth. To achieve its ambitious goals, NIO needs to continue delivering high-quality vehicles on time and in large quantities, the companies said.
Despite these risks, both Jefferies and Citi are confident in NIO’s long-term growth potential, as the company is poised to benefit from a sector-wide upgrade in China’s NEV market, where strong government support and growing consumer demand for electric vehicles create a favorable environment for growth.
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