Why Nio Finally May Be Safe to Buy, Maybe

The markets may have surged in 2019 with double-digit percentage gains, but that was after the fourth quarter of 2019 gutted the enthusiasm of many investors. One stock that has refused to participate in the 2019 broad recovery rally has been Nio Inc. (NYSE: NIO). Shares of the Chinese electric vehicle maker were still down almost 20% this year alone, and the company was highly unlucky on the timing of its initial public offering in September 2018, just before the mudslide began.

Two brokerage firms, Citigroup and Merrill Lynch, issued analyst upgrades on Nio on Thursday, April 4, 2019. These calls made some impact earlier in the morning, but after investors started reading the tea leaves Nio shares were back to almost being flat by mid-morning trade.

While Nio priced its 160 million American depositary shares at $6.26 apiece, for a total offering size of roughly $1.0 billion, the shares initially surged and hit a high above $13, before gravity came into play. And shares have been quite volatile in 2019, with the company having large losses, recovering back up to $10 before coming back down again.

On top of a poorly timed IPO ahead of the fourth quarter of 2018, some of the weakness in the first quarter for Nio shares was around weak delivery numbers, along with high valuations coming into the IPO lockup expiration. Some lower subsidies for electric vehicles in China also played a role.

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Merrill Lynch has removed its Underperform rating on Nio, raising its rating to Neutral from Underperform and assigning a $6.20 price objective. The firm already had lowered its price objective to $6.80 from $8.00 back on March 6, along with the downgrade to Underperform from Neutral. The report noted that slower sales growth of electric vehicles in China should be factored in after the sell-off that was seen in March.

Merrill Lynch’s Ming Hsun Lee sees sales volume growing in the second quarter on the back of the company’s new six-seat ES8 and higher orders coming from more test-drive events in more cities in China.

Citigroup’s Jeff Chung raised the stock to Buy from Neutral, but the firm’s official price target was lowered to $6.80 from $7.20. Citigroup sees ES6 sales being stronger than the consensus expectations this summer.

Nio sometimes has been considered to be one of the “Tesla(s) of China,” but while the first-quarter deliveries of its ES8 electric sport utility vehicle beat expectations, it was on small numbers. Nio delivered 1,805 ES8s in January, 811 in February and 1,373 in March, or just 3,989 in total for the quarter. This was ahead of Nio’s prior forecast range of 3,500 to 3,800 deliveries.

Nio shares opened up about 2% at $5.39 on Thursday, after closing at $5.31 on Wednesday, but the shares had slid back to flat after less than an hour of trading. Nio’s post-IPO range is $4.90 to $13.80.

Removing an Underperform (Sell) rating and replacing it with a Neutral rating may not be the world’s strongest endorsement. That said, it occurred on the same day that another analyst is telling clients to buy the shares.

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