NIO: Back On Track But A High Risk/Reward Opportunity (NYSE:NIO)
NIO Inc. (NYSE:NIO) has just reported its Q3 results, showing strong growth and an improving margin. The stock is up on the day, as investors seem to believe this could be a turning point for the stock.
Indeed, I believe the worst could be behind the Chinese economy for now. NIO’s stock should benefit in the coming months from support in the form of monetary policy and even financial aid.
Based on technical analysis, I think NIO’s stock could quickly double from here.
In my last article on NIO, I called the stock “a rollercoaster worth riding”. In a matter of months, NIO’s stock price doubled and then fell by 50%, essentially going up all its gains.
NIO is a volatile stock, but behind this stock, there is a fast-growing quality EV manufacturer that has just reported strong earnings. Add to this continued support for the economy and the EV sector from the Chinese government, and I believe NIO is in for a strong 2024.
NIO’s latest quarterly results show an encouraging trend, both on a QoQ and YoY basis:
As we can see, vehicle sales increased 142% QoQ and over 45% You. This was achieved while also increasing vehicle margin, which came in at 11%.
That said, the company generated a loss of over $600 million. Note that the figures above are in millions of RMB, and the company ended the quarter with around $6.2 billion in cash and equivalents.
During the quarter, the company also released the EC6, a smart electric SUV, and also completed its partnership with the state-owned manufacturing JAC.
Future Outlook and China
The NIO company, stock, and the broader economy where the business operates in China have been struggling over the last year. The Chinese economy is still reeling from a real estate crisis, and NIO has been struggling with production and other issues.
However, the latest quarters are an encouraging sign that the company’s activities have returned to normal.
The biggest question moving forward is if NIO will be able to achieve profitability. Analysts expect the company could break even by 2026.
The company did manage to increase its margin, thanks to improved efficiencies.
Our vehicle margin increased to 11% in the third quarter of 2023, attributed to the elevated average selling price, ongoing vehicle cost reduction, and economies of scale
Source: Earnings Call, CFO Steven Wei Fang
In terms of growth, while China has been pushing EV adoption hard, the sector struggled in the last year. A recent probe revealed that JAC, NIO’s manufacturing partner, was amongst the top 10 recipients of subsidies.
But despite the help from the government, the sector won’t do well as the Chinese economy continues to flounder.
In November, the Caixin PMI rose to a three-month high, showing improvement in customer spending and industrial production.
In 2024, the PBoC and CCP are expected to continue to support the economy.
It is expected that next year China will continue to implement positive fiscal policy, monetary policies that are in line with positive fiscal policy, with a relatively large policy space to lower the reserve requirement ratio
All in all, I think there are reasons to be bullish here on China and NIO.
From a technical standpoint, I think the stock is gearing up for a big move:
As we can see, we have been forming a downward wedge over the past two months. The last time this happened, the stock ended up breaking out above $14.
This time, however, it could be the beginning of a new bull run. With the latest low, I believe that we could have completed the wave (5) from the top, which means we could now be starting a much larger move higher.
If we do break it down from here, the 61.8% fib retracement comes in at $5.59, and this could be an even better spot to add.
With that said, investing in NIO comes with significant risks investors should be aware of.
Investors still face the risk of dilution as the company continues to lose money every quarter. Furthermore, there are geopolitical elements that could derail NIO’s production, such as export bans on chips.
Lastly, and though the news around this has been largely subdued lately, the threat of escalation in Taiwan is still very real. No doubt, this would have grave effects on Chinese business and investor sentiment.
All in all, I view NIO as a high-risk/reward opportunity. I think the company has a great product and an exciting future, but this is still a young, unprofitable company with the added “risk” of operating in China.