Ever since early November 2021, the rally in fast-growing tech companies has largely accelerated into reverse.
Rather than soar when a company reports high double-digit growth that exceeds lofty investor expectations, such companies’ shares suffer another plunge in response to a slightly lower-than-expected growth forecast.
Since hedge funds and other large pools of money are not required to disclose their trading decisions until it is way too late, the average investor can only speculate as to what might be causing these stocks to plunge.
This comes to mind in considering shares of Shanghai-based electric vehicle (EV) maker Nio whose NYSE-traded American Depository Receipts have fallen 68% since peaking in January 2021. On March 24, shares of Nio — 5.3% of which are sold short , according to the Wall Street Journal — fell over 9% after a report that beat top-line estimates while falling slightly short on revenue guidance.
Is Nio’s much lower stock price a buying opportunity? If the rules that generally drive stock market behavior return some day then I think investors should consider buying this stock as it declines for three reasons:
- Nio’s market is large and growing
- Nio is growing faster than the industry due to its excellent products
- Possibility of unexpected good news this week when Nio reports monthly deliveries
(I have no financial interest in the securities mentioned in this post).
Nio’s Latest Earnings Report
Nio reported faster than expected revenue growth in the fourth quarter and disappointed analysts with its forecast for first quarter revenue. According to Yahoo!FinanceNio’s fourth quarter revenue grew 49% to $1.55 billion — $30 million more than the consensus while the midpoint of its first quarter revenue forecast of $1.54 billion fell $120 million short of analysts’ forecasts.
Nio focused its rapid growth for 2021 in the face of supply chain challenges. As William Bin Li, Founder, Chairman and CEO, said in a statement, Nio shipments grew 109.1% in 2021 to 91,429 vehicles despite the challenges — including “supply chain volatilities.”
For 2022, Nio’s sales are expected to increase by about 75%, according to Barron’s, which tallied significant analyst upside as reflected in price targets. 91% of the 34 analysts who cover Nio rate it a buy with an average price target of $45.30 — implying more than 100% upside — which compares favorably to the 13% upside for the S&P 500 given analyst targets.
Nevertheless, analysts point out risks to Nio shareholders. A Morgan Stanley analyst cut his price target for the ADRs from $66 to $34 while maintaining a buy rating. According to Morgan Stanley Analyst Tim Hsiao, Nio should be able to overcome headwinds such as geopolitical tensions, pervasive COVID curbs, and ADR de-listing risks.”
I wrote last December about the de-listing risk of Chinese stocks. This could affect Nio — whose shares recently began trading as well on the Hong Kong Stock Exchange.
The value of Chinese stocks trading in US markets fell $600 billion in 2021 and the trend is likely to continue. The reason is a recently passed US law requiring more disclosures from the auditors of Chinese companies coupled with “pressure from Chinese regulators on companies with a lot of data to list in China instead.”
China responded by forcing ride sharing company Didi to delist from the NYSE and sell shares in Hong Kong due to its massive holdings of data about its customers. The possibility that this same thing could happen to Nio ADRs could be sending its shares lower.
Nio’s Large, Fast-Growing Market
Nio is a leader in the Chinese EV market which is large and growing. As I wrote in December, the market reached $98 billion in 2019 total revenue which is forecast to grow at a 31% average annual rate through 2026.
The Chinese government is helping to propel this growth. It wants to slash exhaust emissions and reduce its dependence on oil imports. In Beijing the number of permits for internal combustion engine vehicle registrations is limited to 10,000. China also offers considerable tax exemptions for EV buyers.
Last October, JP Morgan predicted that Nio’s share of the market would increase. According to analyst Nick Lai, Nio is an emerging winner in the “premium” space of the Chinese EV market. He expected Nio’s share to grow from below 5% in 2021 to 20% in 2025 as a result of “a change in consumer preferences and a reduction in EV prices as battery costs fall.”
Nio’s Excellent Products
Another reason that Nio is likely to gain market share is its excellent products. Nio’s vehicles are of relatively high quality — beating Tesla. According to JD Power, Nio ranked highest among all brands in the battery electric vehicle (BEV) segment with 109 problems cited per 100 vehicles (PP100) followed by Tesla (113 PP100) and ORA (129 PP100).
Nio’s ES6 is ranked highest in the midsize BEV segment, according to JD Power. Nio excels in design and has the potential to improve in manufacturing. How so? “Both domestic and foreign startups, such as NIO and Tesla, are more outstanding in exterior design, human-machine interaction and technology innovation, while joint venture brands surpass others in manufacturing techniques,” said Eileen Ren, vice president of NEV solutions at JD Power China.
Last fall, NIO hosted NIO day where it introduced new products. These include the “ET5, a smart, mid-sized sedan with a 1000 km range priced at close to $41,000 battery swap. The ET5 will introduce further Autonomous Driving capabilities for a subscription fee of $107 a month and it will include PanoCinema, a panoramic digital cockpit featuring AR and VR tech,” according to SeekingAlpha.
Nio is also expanding into new geographies. “With the Norway expansion already underway, NIO now has its sights on Denmark, Sweden and Germany.” Moreover, in the third quarter of 2022, Nio will begin to produce cars in NeoPark, with a production value [of $80 billion] per year,” wrote SeekingAlpha.
This Week’s Monthly Deliveries Report
A possible short-term catalyst for Nio shares is a very positive report for March vehicle deliveries. According to SeekingAlphaIn January and February, Nio delivered 15,783 electric vehicles “largely because of Chinese holidays and a shorter trading month in February.”
The dip in shipments for the first two months of 2022 was widespread throughout the Chinese EV market. Seeking Alpha expects “a strong rebound in March — [9,217 units shipped] — to delivering about 10,000 EVs a month.” For 2022, Nio could boost annual deliveries roughly 100% to around 190,000 EVs.
If this report exceeds analyst expectations and the company continues to grow more rapidly than the consensus view, Nio’s shares should rise.
Credit: www.forbes.com /