- NIO is positioned very well for delivery surge once supply chain issues are resolved.
- Even with one hand tied behind its back, year-over-year deliveries continue to grow.
- Many investors don't take into account the fact the company strategically reduced production in order to retrofit and/or add new production capacity - this was done not too long before.
- The timing of COVID-related shutdowns disproportionately hit NIO because of the reduction of its competitive advantage and momentum.
- Barring another significant shutdown, NIO should come roaring back in the second half of 2022, and really take off in 2023.
Of all the China-based EV producers, NIO (NYSE:NIO) was it the hardest because of the timing of the shutdowns related to COVID, just as it was boosting production as a result of retrofitting some facilities while adding more new production capacity.
While its peers in China were also impacted, NIO was disproportionately so because of the loss of its competitive advantage that would have allowed it to further distance itself from its competitors.
In this article we'll look further into the impact it has had on NIO, and why the company will surprise to the upside as its supply chain problems are solved and new models are released in quantities reflecting the increase in production capacity that will result in it taking market share at different price points in the EV sector.
Latest delivery numbers for NIO and its peers
For the month of July, NIO reported it had delivered 10,052 vehicles, up 27 percent year-over-year, but down 22.4 percent sequentially. In June the company delivered 12,961 vehicles. So far in 2022, the company has delivered 60,879 vehicles, up 22 percent year-over-year.
So far in 2022, the company has delivered 70,825 vehicles, a gain of 82.81 percent from the 38,743 delivered last year in the same time frame.
Sequentially, the number of vehicle deliveries were down 24.7 percent.
Why NIO's strategy should pay off big
Before restrictions associated with COVID hit, NIO had reduced production in order to retrofit and/or increase production capacity. When it wasn't too far away from completing the project, it was forced to shutter most production in response to Chinese authorities.
That was particularly devastating for NIO because, not only had production reduction allowed its competitors to gain ground on them, but it also removed the advantage the company would have had when the boost in production was operational. So, it slowed down production before COVID but wasn't able to gain the advantage it had planned for when it was ready to ramp production up.
To this day its full production potential remains subdued because of issues also associated with its supply chain, especially regarding its ET7 and EC6 models.
The company says production should "accelerate," starting in the third quarter of 2022. Unless there is another round of restrictions, I believe NIO is going to enjoy solid growth over the next year and beyond.
But even if there are restrictions, long-term NIO shareholders shouldn't be concerned, because all it will do is delay the inevitable surge in vehicle deliveries when restrictions are fully removed and its supply chain partners providing sustainable parts.
I like NIO's strategy of competing in a variety of EV markets, and with its production capacity largely in place, it should easily be able to leverage its capacity nicely when it is finally able to take advantage of its preparation for growing market demand in the EV sector.
How to think of NIO's growth
We've already looked at restrictions related to COVID and supply chain challenges that have impacted NIO. Now I want to look at the growth trajectory of NIO connected to the number of models it is going to produce in order to compete in a variety of markets.
If a company has one or two models it's producing, it has the strength of being able to offer that to the public in a straightforward way that allows for customers to understand what that model represents.
If an EV company like NIO decides to compete in several segments of the EV market, it will likely grow at a modest pace in comparison to companies offering only a couple of models. That can create the illusion of slow growth, but what happens over time is it creates that hockey stick growth, once momentum accelerates over a period of time.
I see NIO being in that place now, and there is no doubt in my mind over the next year it's going to start increasing deliveries at a significant level across the various models it releases. There will of course be different percentages of growth depending on how long the model has been offered to the market.
This, again, assumes there won't be any major disruptions associated with the pandemic or supply chain. If market and economic conditions remain healthy, NIO is poised to take off.
NIO has done many of the right things it needed to do in order to position itself for long-term growth.
It is going to continue to release some new models going forward, including a vehicle that will compete in the low to mid-range market, along with a "sub-brand codenamed ALPS."
The company continues to battle against conditions outside its control, and I see nothing within the parameters of those things it can control that will meaningfully cut back on its growth trajectory, that is once again gaining momentum.
The worst thing that can happen to the company as it stands today is for there to be temporary slowdowns associated with its supply chain or pandemic restrictions.
It has plenty of cash on hand and access to capital, so should have no problem navigating short-term disruptions in its growth.
As mentioned above, NIO has chosen to compete with a variety of models in different markets. This could give the appearance of slow growth, but as it gains market share in each segment it competes in, it should eventually start to generate a lot of deliveries that, over time, will provide a graph with the appearance of a hockey stick. That will take a few years I believe.
In the near term, NIO should generate delivery growth, that I believe, will surprise to the upside over the next year if there no big disruptions. If there are disruptions, it should be considered only temporary noise in the long-term growth I believe is inevitable for NIO.
This article was written by
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.
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