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Expect a Big Rally for NIO Stock as New EV Models Boost Deliveries

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Chinese stocks have gone through rough times in the last 12 months. Regulatory crackdowns and concerns about delistings from U.S. exchanges have been major headwinds. Nio (NYSE:NIO) has been no exception to this trend. Recently, NIO stock plunged to a 52-week low of $13.01.

A Nio (NIO) store at night in Shanghai, China.

Source: Robert Way / Shutterstock.com

However, a sharp rally ensued and the stock currently trades at $21.72. The reason for the rally was Beijing’s vow to keep the markets stable. This helped soothe investors’ nerves.

Before I talk about NIO stock, let’s discuss a bit of macroeconomics. The private sector is the dynamic, or growth-triggering, sector of the economy. On the other hand, the government is a relatively static sector.

If China wants to maintain healthy gross domestic product (GDP) growth, there has to be support for the private sector. Therefore, the regulatory crackdown is overdone and is beginning to impact growth.

Things are likely to get better from here. However, the near-term concerns for Nio are not limited to regulatory headwinds. Chip shortages have impacted the growth potential of electric vehicle (EV) companies. However, it’s likely semiconductor supply concerns will ease in the second half of 2022. This can help with accelerating growth.

Recently, Deutsche Bank reiterated a buy rating for Nio stock with a price target of $50. This would imply a 130% upside from current levels. I would not be surprised if this target is achieved in the next 12 months.

Growth Catalysts for Nio

Even with the chip shortage, deliveries have remained robust for Nio. In 2021, the company delivered 91,429 vehicles. On a year-over-year (YOY) basis, deliveries increased by 109.1%.

For the first two months of the year, Nio has delivered 15,783 vehicles. Growth has been relatively muted on a YOY basis at 23.3%. However, I believe the company is positioned for acceleration in delivery growth in the coming quarters.

Toward the end of March 2022, Nio is expected to commence deliveries for the ET7, which is a luxury sedan. German orders for the ET7 are also expected to begin in the fourth quarter of 2022. It’s likely the model will also be marketed in other European countries.

Nio’s second electric sedan, ET5, is expected to commence deliveries in September 2022. This model will be sold at a lower price compared to the ET7. With a broader addressable market, the ET5 is likely to boost delivery growth through 2023.

Therefore, geographical expansion coupled with new model launches are the catalysts for deliveries growth.

Additionally, Nio already has 700 battery swap stations in China. In January 2022, the company also launched its first battery swap station in Europe. Overall, Nio plans to install 4,000 stations by 2025. This will include 1,000 located outside China.

This is important, as 92% of the customers in Norway chose the battery-as-a-service (BaaS) option rather than a full purchase. Using BaaS lowers the initial purchase price. With the ramp-up in battery swap stations, sales will accelerate with Nio gaining a pricing advantage.

The Bottom Line on NIO Stock

In Q3 2021, Nio reported cash and equivalents of $7.3 billion. The company also raised $2 billion through an at-the-market offering in November 2021. The company therefore has ample cash for international expansion, product development and manufacturing capacity expansion.

Once chip shortage concerns subside, Nio will be positioned to significantly increase its manufacturing activity. The company expects to increase capacity to 600,000 vehicles by the end of 2022.

From an industry perspective, the recent surge in energy prices provides yet another reason for the transition to EVs. Europe will be trying to reduce its energy dependence on Russia, and this will also benefit the sector in the coming years.

In all probability, the worst seems to be over for NIO stock. It has already surged from recent lows. I believe the positive momentum is likely to sustain, as Nio reported healthy deliveries and improvement in its vehicle margin.

On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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