NIO's Fate In The Midst Of The EV Carmageddon

Summary

• Several headwinds outside the control of NIO continue to weigh on the company.
• All the EV production companies located in China are getting hit hard.
• The long-term growth trajectory of the industry, and NIO, remains in place.
• NIO is still positioned strong for solid growth.

Andy Feng/iStock Editorial via Getty Images

The doomsayers were out in force when the latest delivery numbers for EV companies in China reported, with NIO's (NYSE:NIO) deliveries dropping to 5,074 in April, against the 9,985 delivered in March. Its peers XPeng (XPEV) and Li Auto (LI) didn't fare much better, with XPeng deliveries for March coming in at 9,002, a drop from 15,414 in March, Li Auto plummeting to 4,167 deliveries in April, from the 11,034 Li ONEs delivered in March.

When news of this first hit the wires, a number of people in chat rooms and forums immediately started to predict doom on Monday morning for NIO and the others; in the case of NIO, there were assertions it was going to fall into single digits.

This was of course ludicrous. As a matter of fact, as I write on Monday afternoon, the share prices of all three companies were trading up from 2 to 3 percent. The reason why that happened because the market had already priced in the very visible impact of China shutting down regions of the country that would have an impact on the EV supply chain in China.

In this article, we'll look at why NIO continues to find support in the midst of unprecedented headwinds, and why I remain very bullish on the EV industry in general, and NIO in particular.

Headwinds

At the time NIO had positioned itself for long-term growth trajectory, it got hit by several major headwinds that have yet to subside. The company had temporarily slowed down deliveries in order to expand production capacity, and when the company was about to boost production, it was hit with the impact of COVID restrictions on its supply chain, rising concerns over inflation, and economic sentiment turning downward. Last, financial media, wrongly in my view, interpreted the increase in deliveries of Li and XPeng as proof NIO was vulnerable to losing market share, even though the companies didn't compete directly with them concerning its customer base.

That's going to change as NIO introduces its new models, but that's a threat to Li and XPeng in my view, not NIO.

While the headwinds had an impact on its peers in China, in my opinion NIO was disproportionately affected because of the optimism surrounding an increase in production capacity, combined with the scheduled release of new models in 2022. In other words, it went through a deflation in outlook because of the high expectations of investors concerning its short- and long-term prospects of the company.

I consider NIO to have stood up well to the extraordinary perfect storm of negative catalysts that have hammered the company. While it could easily drop further in share price because under the current economic conditions, I see the current share price range between $16.00 to $17.00 per share as a good entry point. For those already with a position in the company, I would look to be adding shares within the parameters of your trading plan for the company. Once the smoke clears, I have no doubt the performance of NIO is going to quickly reverse, and we may never see the company trading at such low levels again; this is definitely a buying opportunity for those that have a buy-and-hold strategy.

EV industry outlook

One thing to keep in mind as we hear all the various outlooks for the EV industry debated from the positive and negative perspective is this: do we believe the future of the EV sector is one of long-term growth or not?

To me the answer is obvious: of course, there are many years of growth ahead for the sector, and as it relates to NIO, nothing has changed concerning its prospects other than having a period of delay that requires patience from shareholders and potential investors.

I think it's going to take longer than expected for the EV industry to reach the goals set by a number of governments around the world, but there is no doubt it's going to continue to grow share against rivals in the internal combustion engine segment.

I've personally been adding to my position in NIO, lowering my cost basis. While I was originally looking to swing trade the stock, the rapidly changing conditions have made me decide to hold it longer than I originally intended. I think many readers here are in a similar position.

The good news to me is that I consider it inevitable that NIO will rebound nicely, and not only return to growth, but eventually surpass its prior highs when it successfully launches its new models, while continuing to increase sales of its existing models.

NIO's supply chain is the major concern now, and further out, if it takes some time for that to work itself out, it could then face the beginning of a recession. That could suppress the growth trajectory of the company for another year, or possibly a little longer.

Where NIO is at when that happens will determine the depth of the impact on the company. If supply chains are fixed and production ramping up, a recession won't have as much impact on the company, in comparison if supply chains were starting to regain past performance at the time a recession hits.

Conclusion

One of the major things I've been looking for in these challenging times is ability of a company to endure a prolonged period of weak economic growth and the ongoing headwinds that look like it'll take some time to abate.

NIO had cash and cash equivalents of $8.7 billion at the end of the last reporting period. That will provide a nice cushion and measure of safety as it navigates through these challenging times where most of the headwinds are outside of its control.

As for the reduction in deliveries, I don't consider that of much consequence at all. The significance of it is it could represent a longer period of time before the company returns to prior growth levels. I don't see it as a question of returning to and surpassing those levels, but only a matter of when it does so.

A key reason I'm bullish on NIO is because it had completed its production expansion before the difficult times hit. That means once the market reverses direction, it's prepared to quickly boost production and grow, I believe, at a rapid pace.

That will of course take a little longer than shareholders were looking for even a few months ago, but with a company like NIO, being patient, holding on to shares, and adding to our positions at opportune times on the dip, over time it's going to generate solid returns.

NIO will remain volatile for some time, but it is ready to run once it's able to regain access to its supply chain and take advantage of its increase in production capacity.

Analyst’s 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.