NIO: It Didn't Fall To Its March Lows - COVID Headwinds Priced In

Summary

• NIO reported a hugely underwhelming April delivery report. However, the stock didn't fall to its March lows. Therefore, we believe it has already priced in significant headwinds.
• NIO still needs to deliver a robust Q1 card, which was not impacted by the COVID lockdowns. That should improve confidence in its execution.
• However, given the recent headwinds, we don't expect the stock to be re-rated in FY22. But, we expect the stock to consolidate in a range moving forward.
• We think NIO stock has found its bottom. Therefore, investors can capitalize on its weakness to add exposure.
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Investment Thesis

NIO Inc. (NYSE:NIO) reported an April delivery card that reflected the significant challenges from the recent COVID lockdowns in China. As a result, we believe it could spend the next two quarters recovering to full production, impacting its revenue and profitability estimates.

Notably, the consensus estimates for FY22 have also been revised markedly downwards, reflecting these headwinds. Therefore, we believe that its stock re-rating could be delayed further into FY23. However, our price action analysis also suggested that the near-term bottom could be in. Despite the underwhelming April report, the stock did not revisit its March lows.

Furthermore, we also explained in a recent Alibaba & Chinese tech stocks article that the regulatory environment had improved markedly. Even though the COVID situation remains fluid, automotive businesses in Shanghai have started to resume operations. Therefore, we think the worst seems to be over for NIO and its Chinese EV peers.

Consequently, we reiterate our Buy rating on NIO stock as a speculative opportunity only.

NIO's Weak April Deliveries Are Expected

NIO deliveries by month (Company filings)

NIO delivered just 5.07K of vehicles in April 2022, down 28.6% YoY. It was also the company's worst showing since October 2021, when it delivered 3.67K of vehicles. Of course, its October performance was affected due to its production line upgrade. In April 2022, NIO was hit by industry-wide production cuts resulting from China's massive COVID lockdowns.

However, we believe that the impact is transitory, not structural, despite the downbeat numbers. Furthermore, companies in the automotive supply chain have started to resume operations. Therefore, NIO is also expected to increase production gradually. However, we expect full production resumption to recover only from H2'22. Deutsche Bank (DB) also weighed in recently, as it added (edited):

We expect some spillover effects in May related to suppliers slowly returning to production, while June could be the first "normal" month, assuming Covid conditions return to normal. NIO also continues to ramp up sales of its newly launched flagship ET7 sedan. We believe it will be one of the most popular premium cars on the market this year. - CnEVPost

Production Resumption In H2'22 Is Key For Re-Rating

NIO revenue YoY change % consensus estimates (Company filings)

NIO adjusted EBIT margins % consensus estimates (Company filings)

As a result of the unexpected production curbs, the consensus estimates on NIO's revenue and profitability have been revised substantially downwards. Therefore, NIO's path to profitability has also been further extended.

Notably, NIO is estimated to post revenue growth of 22.3% in FQ1, which was not impacted by the lockdowns, which intensified only at the end of March. However, its Q2 revenue growth estimates have been revised to 41.9%, from 47.8% (March estimates). Moreover, NIO's revenue growth cadence is also expected to be affected throughout the rest of FY22.

In addition, NIO's adjusted EBIT margins are also estimated to suffer from significant markdowns. For instance, NIO is expected to post an adjusted EBIT margin of -15% in Q2 (ending June), down from the -8.6% estimates in March. Commentary from the Street also seemed downcast, as Morgan Stanley (MS) accentuated (edited):

NIO's vehicle production and delivery were severely affected by supply chain disruptions amid COVID-19 lockdowns in China. Though soft April sales should have been well anticipated, investors are likely to keep a close watch on the resumption progress post-China's May holidays. - The Fly

Therefore, we strongly encourage investors to watch the automotive supply chain developments closely.

Is NIO Stock A Buy, Sell, Or Hold?

NIO stock price chart (TradingView)

As seen above, the market is still digesting the gains from 2020, overturned by the 2021 bull trap. Furthermore, NIO stock has also fallen through the 61.8% Fibonacci retracement level, indicating that the momentum is bearish.

However, we also observed that NIO stock did not break below its March lows, despite the underwhelming April delivery report and revised estimates. Therefore, we are sanguine that the market has already priced in significant headwinds in NIO stock.

Accordingly, we think the stage has been set for management to more easily outperform moving forward. In addition, the revised estimates have lowered the bar for NIO to beat its upcoming Q1 earnings card, coupled with its Q2 guidance.

However, we think its re-rating could take longer, potentially only from FY23, as the market parses its production cadence. Nevertheless, we believe the bottom seems to be near, as long as the COVID headwinds don't get worse moving forward.

As such, we reiterate our Buy rating on NIO stock. However, we emphasize that it's suitable only as a speculative opportunity. Therefore, investors are reminded to size their exposure appropriately.

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.