Is NIO Stock A Buy Or Sell After Goldman Sachs Upgrade?

Summary

• NIO has moved down by almost 40% since its peak of more than $66 earlier this year.
• The stock has not been spared from wavering investors sentiment stemming from extended supply chain disruptions and regulatory woes in China.
• Yet, better-than-expected Q3 delivery volumes and Goldman Sachs' upgraded "buy" rating on the stock have triggered a slow but steady extended uptrend in recent weeks.
• Fresh catalysts including the upcoming release of Q3 results, potential unveiling of new vehicles at NIO Day 2021, and delivery commencement on the ET7 sedans could boost investors' confidence and spur a sharper uptick in the stock's performance.
• This underpins renewed upsides for the stock, making its current price level a reasonable entry point for investors.

Robert Way/iStock Editorial via Getty Images

It has undoubtedly been a rocky year for NIO's (NYSE: NYSE:NIO) stock. Wavering investor sentiment stemming from the ongoing chip supply shortage and regulatory headwinds in China have put serious pressure on the stock. NIO has moved down 40% since peaking at more than $66 earlier this year.

But Goldman Sachs’ improved outlook on the stock, paired with NIO’s stronger-than-expected delivery numbers for the third quarter may be an indication that it is finally due for a turnaround. NIO's stock has been on a slow but steady uptrend in recent weeks. It gained 7% since NIO’s release of third quarter delivery results earlier this month, and about 5% since Goldman Sachs announced its revised rating from “hold” to “buy” at a price recommendation of $56 on the stock a few days back.

The gradual uptrend is expected to persist, with fresh catalysts on the near-term horizon. The upcoming release of NIO’s third quarter earnings is expected to shed light on its progress with growth initiatives, including additional detail on the launch timeline of its new brand and product roadmap, and boost investors’ confidence on NIO’s financial prospects. NIO’s annual keynote event at year-end, NIO Day, which typically walks through new product and technology upgrades and launches, will likely provide additional detail on the two new vehicles and separate line launching in 2022 at the minimum, if not making the event their official launch like the EV maker did for the ET7 at NIO Day 2020.

Robust demand for EVs in China also continues to underpin long-term growth opportunities for NIO. From its debut in 2018, NIO has grown into one of the most prominent EV brands in the fast-growing Chinese market. On these considerations, we remain bullish on NIO and maintain our 12-month price target at $59.74 discussed in previous coverage, which is similar to Goldman Sachs’ recent recommendation. The stock continues to be well-positioned for the return of a strong rally in both the short- and long-run, given NIO’s roadmap to increasing market share through its ongoing foray in Europe and extensive model pipeline, coupled with an overall rise in global EV adoption. This underpins better valuations ahead, making the stock’s current price levels a reasonable entry point for investors.

Goldman Sachs Ups Rating from “Hold” to “Buy”

About a week ago, Goldman Sachs upgraded their rating on NIO from “hold” to “buy” with a price recommendation of $56. Goldman Sachs’ expectation on NIO’s upside potential also resonates with Bank of America’s “buy” rating at $62. Release of the news sent NIO on an intra-day climb of close to 7%. Goldman Sachs’ research notes indicate that the upcoming commencement of customer deliveries for the ET7 premium luxury sedan early next year could “cement the company as a leader in the premium EV market”, and underpin renewed upsides for the stock.

The ET7 is a premium full-size “smart” electric sedan that directly competes with Tesla’s (TSLA) Model S, Mercedes S-class and the BMW 7 series. With a price tag starting at RMB 448,000 or from RMB 378,000 with subscription to BaaS, NIO’s proprietary battery solution subscription service, the ET7 makes NIO’s most expensive vehicle model released to date, outside of the EP9 supercar. The ET7 is built on the NIO Technology platform 2.0 (“NT 2.0”), a brand-new higher-margin technology platform, and features NIO Autonomous Driving (“NAD”), the EV maker’s proprietary advanced driver-assistance system (“ADAS”). NAD is powered by “NIO Aquila Supersensing” and “NIO Adam Super Computing”, which combines 33 high-performance sensors and high-resolution perception hardware including 118-megapixel cameras and an ultra-long-range LiDAR, with advanced computing power to enable a safe and streamlined self-driving experience.

The ET7 also features one of the highest range capabilities in the industry. When fitted with NIO’s legacy 70 kWh and 100 kWh batteries, the vehicle can travel more than 310 miles and 434 miles, respectively, on a single charge. But with the newest 150 kWh solid-state battery pack that will soon be added to NIO’s current line-up of swappable batteries, potentially by Q4 2022, the ET7 is expected to deliver a range capability of up to 620 miles on a single charge, topping current record-holder Lucid Motors’ (LCID) range capability of 520 miles on a single charge. Coupled with its proprietary battery swapping technology, which can switch a drained battery out for a fully charged one in under three minutes, the ET7 will become one of the first premium smart electric sedans to address two of the biggest roadblocks to global EV adoption – range anxiety and long charge times.

Goldman Sachs has estimated a monthly demand for more than 10,000 premium vehicles in the Chinese market. Paired with the Chinese market’s increasing demand for EVs, the ET7 and its advanced technological capabilities make NIO well-positioned to partake in the growth opportunities ahead and better compete for market share within the rising segment. With an improved outlook in the books for NIO’s emerging leadership within the premium EV market, the EV maker is slated for better valuation prospects ahead.

Recent Developments and What They Imply

Q3 Delivery Results

September delivery volumes reached an all-time monthly high in NIO’s history. The EV maker delivered 10,628 vehicles in the last month of the third quarter, up 125.7% year-over-year and 80.7% from August’s slump due to supply chain disruptions. In total, NIO has delivered 24,439 vehicles in the third quarter, representing growth of 100.2% year-over-year.

The stunning results came as a surprise amid a global tightening of automotive chip supplies – and especially after the EV maker had revised their initial Q3 delivery guidance down from 23,000 to 25,000 vehicles, to 22,500 to 23,500 vehicles in August, following a disappointment in mid-quarter delivery volumes due to chip supply constraints. Actual third quarter deliveries beat the higher range of the revised quarterly delivery guidance, and also exceeded the median of its original quarterly delivery guidance.

The push of deliveries at the last hour is a strong testament to NIO’s ability in navigating prudently through significant operational pressure, while many legacy automakers continue to reel from prolonged impacts of supply chain constraints. A revised estimate on the quantified impact of ongoing chip supply shortages for the global automotive sector has jumped to $210 billion, equivalent to 7.7 million fewer vehicles produced compared to a previous forecast of 3.9 million vehicles. NIO’s continued outperformance with robust year-over-year growth despite multiple industry headwinds brings a strong boost to investors’ confidence on the stock’s upside potential.

Overseas Expansion Progress

The first overseas NIO House studio in Norway has opened on September 30^th in Karl Johans Gate in Oslo, a landmark main street similar to Oxford Street in London. And the first vehicle deliveries within the region have also been completed and captured in the most recent September delivery results. Making Norway its first overseas location was a prudent move for NIO, which aims to further expand its market share and partake in growth opportunities in the broader European EV market.

Favourable government policy support in Norway has played a fundamental role in the country’s push towards electrification of its transportation sector. Norway aims to have all new car sales be emissions-free by 2025. In order to achieve this goal, the government has made EV purchases exempt from sales taxes, while keeping costs of ownership extremely low compared to ICEs thanks to steep discounts from ferries, public parking and toll roads, in addition to cheaper charging costs. Emissions-free vehicles currently account for more than half of annual car sales in Norway, with the Norwegian Automobile Federation predicting the vehicle segment to account for 100% of new car sales as early as April 2022, making it the first country to have achieved mass-market EV adoption.

The Norwegian market has also become a big fan of Chinese EVs in recent years thanks to earlier entrants like MG Motor (owned by SAIC Motor) and BYD (OTCPK:BYDDF), which have pioneered demand in the region for other home-grown peers, underscoring a promising sales outlook for NIO. The broad acceptance of Chinese EVs in Norway also helps to build greater brand awareness for NIO across Europe, which will be important to its ongoing overseas expansion plans. In addition to the opening of new locations across Norway, the EV maker also has plans to make its debut in Germany in late 2022, then in Amsterdam after to capitalize on the growing opportunities in Europe, which is currently the second-largest EV market in the world.

Achievements in Autonomous Driving Technology

NIO’s timed entry to Germany also aligns with Mobileye’s planned debut in the region next year, which will help to further the EV maker’s brand reception in Europe. Mobileye is an Intel-owned (INTC) autonomous vehicle technology company. As discussed in one of our previous articles on the stock, NIO has an ongoing collaboration with Mobileye to ultimately develop and commercialize level 4 autonomous driving, which will not require human interaction. NIO will also be the host of Mobileye’s future robotaxi fleet. Starting next year, Mobileye will launch a pilot program for robotaxis in Tel Aviv and Munich, featuring NIO’s ES8 SUVs equipped with “Mobileye Drive” autonomous driving systems. Fully equipped with a suite of 11 cameras, all-around radar sensors and nine LiDARs, the ES8 SUVs were deemed safer than Tesla’s driver assistant system for hosting Mobileye’s robotaxi fleet according to Intel.

The compliment, paired with advanced technological features of NAD as discussed in earlier sections, further validates NIO’s trajectory towards the pinnacle of self-driving technology. Increasing ADAS adoption in recent years based on safety considerations underscores a high-growth segment with a projected value of close to $60 billion by 2025. With NIO’s autonomous driving capabilities being one of the safest and most advanced in the industry, it is well-positioned to capitalize on the opportunity presented. NIO will be offering NAD as a subscription-based service deployed via over-the-air updates to compatible vehicles within its line-up, starting with the ET7 in 2022 at a monthly fee of RMB 680. Because software-as-a-service deployments are typically easier to scale, NIO will likely yield generous margins through the initiative, bolstering its long-term valuation prospects. The deployment of the advanced technology will also be a milestone for NIO and further catapult the brand to a leading position within the EV and tech scene.

Near-Term Catalysts

While the second quarter earnings release had left investors begging for more information after dropping limited but surprising information about the upcoming launch of two new NIO vehicles and a brand new sister-brand in 2022 to better penetrate the mass market, the third quarter earnings release will probably provide further detail to ease the suspense. The EV maker is also expected to provide an update on the production outlook for the rest of the year given ongoing supply chain disruptions, its expansion progress in Norway and the rest of Europe, as well as the delivery timeline for its ET7 sedans. NIO’s guidance for year-end will also be critical for evaluating whether the company is progressing as investors and the broader market have expected. Considering NIO’s better-than-expected delivery numbers for the third quarter, the upcoming earnings call will likely add to the upbeat results and further encourage the stock’s uptrend.

Another highly anticipated event will be NIO Day 2021 at year-end. While the exact date for the keynote event has not yet been released, it is expected to happen sometime between December 1^st, 2021 and January 15^th, 2022 based on prior-year patterns. Many are speculating that the EV maker will debut the two new vehicles announced in Q2 during the upcoming keynote event in Suzhou like it did for the ET7 during NIO Day 2020 in Chengdu. It has been rumored that NIO will be launching a second sedan, dubbed the ET5, during NIO day 2021. The new model is expected to be a midsized sedan built on the NT 2.0 platform with similar designs as the ET7. The upcoming unveiling of new vehicles, which could happen at NIO Day 2021, is likely to be catalytic for the stock. Last year, the unveiling of the ET7 during NIO Day 2020 had sent NIO’s share price to an all-time high of more than $66, jumping close to 20% from the preceding trading day’s low.

Conclusion: Is NIO Stock a Buy

Similar to Wall Street consensus, our outlook remains bullish on the stock with a 12-month price target of $59.74, which points to upside potential of more than 58% based on the last traded share price of $37.71 on October 15^th. While the stock has been greeted by extended turmoil in the last eight months following investors’ concerns over protracted supply chain disruptions and regulatory headwinds in China, it may finally be due for a turnaround at this time. Recent developments and upcoming catalysts all point towards better valuation prospects ahead for NIO. This underscores a promising uptrend for the stock in both the short- and long-run, making its current price level a reasonable buy opportunity.

Disclosure: I/we have a beneficial long position in the shares of NIO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.