Momentum for Chinese electric vehicle manufacturer NIO (HK:9866, US:NIO) took off last Friday after the company announced first-quarter results. The HK shares closed 5.8% higher today and the US ADRs are up 2.5% at last look ahead of the NYSE open on Tuesday.

Although the soft Q1 figures, which reflected lower revenue and constrained operating cash flow, there are several key factors that make NIO an intriguing stock to watch or consider buying into at this juncture. 

Fintel’s coverage of NIO helps delve into the analysis to explore the reasons behind this sentiment change.

Street Shortfall

NIO’s Q1 results were marked by lower-than-expected revenues of RMB 10.7 billion ($1.5 billion), falling short of the Street’s expectations by $1 billion. While the market expected more, the sales still posted 7.7% growth on the prior year.

NIO reported a growing adjusted net loss from RMB 1.3 billion in the first quarter of 2022 to a loss of RMB 4.15 billion this year as the stock was tempered by rising costs. A chart from NIO’s earnings page shows the performance versus expectations for each report since 2018.

A larger number of lower-margin sedan models drove down overall margins and the business saw continued headwinds that impacted delivery volumes and also operating cash flows. The margins were also impacted from higher promotional discounts on older legacy models.

A chart from Fintel’s financial metrics and ratios page for NIO shows the growing levels of sales in the previous five years.

Watch Deliveries

Management also provided guidance for 23,000 to 25,000 deliveries in the second quarter that broadly was within consensus ranges. It projects a recovery in volumes and margins in the second half of the year.

Analysts in the market highlighted NIO’s robust product pipeline, with recently launched models such as the ES6, ET6, EC7, and upcoming releases like the ES8 getting attention.

While there are concerns around the high competition in the market and the weak performance of NIO’s sedan models, the company’s guidance on monthly sales after the ramp-up of new models remains optimistic. The successful execution of this strategy could significantly impact profitability and drive sales growth.

Despite the margin miss in Q1, there is a general consensus view in the market that there is a path for margin recovery based on management’s plans. However, some reservations exist regarding the pace of this recovery, suggesting a more cautious approach.

Investors should closely monitor NIO’s delivery volumes, as it remains crucial for achieving profitability given the company’s strict cost structure. Additionally, concerns over potential cash burn and adjustments in investment spending pose risks but could be mitigated by prudent cost controls.

Nomura analysts said it will be “key to watch for 20K shipments target” on the ES6 deliveries, in a Tuesday note to clients. The research team there has a ‘neutral’ rating on NIO stock.

DBS Bank analyst Rachel Miu thinks that improving vehicle sales in the second half should help lift NIO’s stock price momentum. The analyst thinks that any share price weakness from market volatility should be seen as a buying opportunity.

Miu maintained their ‘buy’ call on the stock but lowered 12-month targets on the dual-traded stock to $12 for the US ADRs and HK$94.50.

Big Upside

Fintel’s consensus target price of $14.91 for the US listing and HK$115.74 for the Hong Kong market, suggests the market thinks the stock could rise 78% or 83%, respectively, over the next year.

The revenue outlook and forward forecasts from analysts show the expectation of a strong ramp up in growth from 2024 and beyond, as long as management can continue to scale production without issues.

With a robust product pipeline and an anticipated recovery in volumes and margins in the second half of the year, NIO has the potential to capitalize on the growing electrification trend.

This article originally appeared on Fintel

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.