Chinese electric-vehicle maker NIO Limited (NIO) surprised the market last week with a Q3 earnings report featuring stronger than expected $667 million in sales and a smaller than expected $154 million loss. One analyst who was not entirely pleased with the results, however, was Deutsche Bank’s Edison Yu.
Yu called Nio’s revenue numbers only “in-line” and criticized Nio for producing “lower-than-expected gross margin.” Despite this, Yu reiterated his “buy” rating on Nio, and raised his price target nearly 50% to $50 as well. Why?
Two words: The future.
Yu observes that Nio’s Q3 2020 gross profit margin was only 12.9%, and not the 14.9% that he had hoped for, “mainly due to an absence of regulatory credits, which we thought would be realized during the quarter but instead will flow entirely into 4Q.” That’s not necessarily a deal-breaker, though, because Yu still does think those improvements in profitability are coming — just three months later than planned. Nio guided investors to expect a 1% to 1.5% improvement in gross margins in Q4, versus Q3, from its own efforts. This still doesn’t get the company all the way to “14.9%,” granted. But when you factor in an anticipated $120 million in delayed “regulatory credits” from the government, and add those to the mix, Yu thinks the company’s total gross profit margin in Q4 could approach 20%.
Indeed, Yu seems to be banking on a lot of good news in the near future, and the longer-term future as well.
Heading towards the Chinese New Year, Yu says investors can expect “robust monthly delivery volume” driven by demand for Nio’s new EC6 electric SUV and the company’s 100 kWh battery option. Nio is forecasting Q4 sales “materially ahead of our/consensus estimates,” says the analyst, with anywhere from 16,500 to 17,000 cars expected to be delivered in the quarter, versus Yu’s guess at 15,000 units, and with revenue similarly higher than predicted.
Production capacity is ramping faster than expected as well, with Nio reaching perhaps 7,500 cars produced per month by January. As the company continues to scale in size, Yu is looking to see Nio produce and deliver as many as 92,500 cars in 2021, while improving its gross margin even past what he expects to see in Q4 — to greater than 20%. Despite this, the analyst expects Nio to lose money next year — $1.20 per share’s-worth — just as it will lose money this year.
So why does Yu still like Nio, despite the continued losses? In a nutshell, because he expects Nio to grow into its valuation over time. Sales in 2022, for example, could be up as much as 40% over 2021 figures, justifying (in Yu’s view) a valuation of 10 times 2022 sales.
Ultimately, Yu predicts that Nio will emerge as “a major winner in the China auto market by the middle of the decade,” and he therefore calls Nio “a must-own stock for growth-oriented and ESG investors.”
Overall, based on 6 Buys and 3 Holds, the analyst consensus rates NIO a Moderate Buy. However, as a result of NIO’s meteoric rise, the average price target, which comes in at $42.93, implies shares could decline by nearly 13% from current levels.