Solid Delivery Numbers Aren’t Enough to Send Nio Shares Surging Again

Stock Market

Holding steady at just under $40 per share, can Nio (NYSE:NIO) stock rebound back its past highs? Don’t count on it. Sure, its recent delivery numbers may have been satisfactory. But, with shares in the China-based electric vehicle (EV) company still trading as if recent growth will carry on in the years ahead, shares have more room to fall before they hit a more reasonable valuation.

NIO stock

Source: Robert Way / Shutterstock.com

Yes, on both a year-over-year, and sequential (month-over-month) basis, Nio’s March numbers look good. Deliveries went up 30% compared to February. Yet, this had more to do with the Lunar New Year depressing demand, rather than the company, after several months of its sequential growth rate losing momentum, regaining its past momentum.

In addition, there are other factors that may result in it falling short of growth expectations for 2021. First, of course, is competition. It’s heating up in its home market. Second, the global chip shortage, which has caused production disruptions for automakers the world over, could negatively affect subsequent delivery numbers.

So, what does this mean for NIO stock in the months ahead? EV stocks may have peaked back in February. But, for the time being, there could be enough interest left to keep major names like this one steady. Yet, with the risk continued disappointment pushes it back to lower price levels, it’s best to hold off.

NIO Stock, March Delivery Numbers, and What’s Ahead

As I said above, last month the company lived up to expectations with its delivery numbers. This may have helped the stock stabilize at today’s prices. But, it’s questionable whether we are seeing the start of a rebound, in both Nio’s growth rate, and in turn, its stock price.

Why? The aforementioned risk factors could make a big negative impact on delivery numbers in the quarters ahead. As InvestorPlace’s Chris MacDonald discussed Apr 7, the company is losing ground to local competitors. Namely, China-based EV giants such as BYD Company (OTCMKTS:BYDDF) and Xpeng (NYSE:XPEV).

But, that’s not all. Global EV powerhouses, like Tesla (NASDAQ:TSLA) and Volkswagen (OTCMKTS:VWAGY), both very active in the Chinese market, will also make it tough for Nio to grow at levels that justify its current valuation (more below).

Then, there’s the chip shortage factor. The company has said it expects to secure the chips its needs for the third quarter. But, for this quarter? The chip shortage may result in it failing to hit its delivery projections during this quarter (ending Jun 30, 2021). With the stock’s recent decline, much of this may be already factored into the NIO stock price. But, as expectations remain elevated, it could result in disappointment a few months out. In turn, this could put more downward pressure on shares.

Valuation Out of Sync With Growth Potential

Admittedly, it’s short-sighted to criticize an EV company on valuation alone. With high growth ahead, leaders in this space deserve premium valuations. But, even when accounting for its likely growth in the coming years, Nio’s valuation remains inflated. Based on its current market capitalization (around $63.4 billion), shares trade for around 12.7x this year’s sales (based on projections below).

With China EV sales expected to soar seven-fold between 2020 and 2030, more likely than not Nio will continue to see double-digit growth. But, even bulls on the stock, such as this Seeking Alpha contributor, are starting to concede growth in 2021 will fall short of prior expectations. Instead of full year deliveries of between 105,000 and 115,000, actual unit sales could come in at between 95,000 and 100,000 vehicles. Unit sales could be even lower, if the chip shortage problem lasts longer than expected. Total revenue could come in at between $4.95 billion to $5.1 billion. That’s slightly below the average sell-side estimate of $5.2 billion.

Sure, only hitting $5 billion in sales isn’t the worst thing in the world. That’s still up around 100% from 2020. Yet, sales growth is set to slow next year and beyond. It may continue to grow at a double-digit clip in the coming years. But, more than accounted for at today’s prices, this may not be enough to push it back to its all-time highs (around $67 per share).

Coupled with the potential for sales to fall further below expectations (due to competition, and the chip-shortage), there’s plenty more room for valuation contraction.

Expected Continued Underwhelming Performance

Investors who ignored the bears, and bought this on the narrative alone (rise of EVs in China) about a year ago have won big with Nio. Despite its recent pullback, shares are up more than 1,300% over the past 12 months. But, with sentiment doing a 180 in 2020, the company’s long-term potential is more than reflected in today’s valuation.

Shares could continue to pullback, as scaled-back expectations call into question its still-inflated valuation. With this in mind, stay away from NIO stock for the time being.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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