Why have NIO shares soared to an all-time high?

• NIO shares have rallied by over 600% since the start of 2020 and now sit at an all-time high.
• NIO is delivering significant growth in sales and has taken a step toward profitability by delivering its first quarterly positive cashflow and gross margin.
• Cashflow is particularly important considering NIO only has enough cash to survive for the next year.
• Prospects are strong and the market expects NIO’s performance to continue to improve in the second half (H2) of 2020.
• The speed and sharpness of the rally risks leaving NIO overvalued, but there are signs that there is further room for shares to rise.

NIO shares hit all-time high

NIO shares have rallied by 600% since the start of the year from just $3.72 to $26.50 today – a record high for the stock.

NIO listed American Depositary Shares (ADRs) on the New York Stock Exchange on 12 September 2018 at $6.36 per ADR. NIO was valued at $6.4 billion upon listing but the momentum gained since late May has pushed the carmaker’s market cap to over $36 billion.

Why have NIO shares soared to new highs?

The business case for NIO was simple when it listed in 2018. The company was losing money and burning through cash but sales of its first car - the ES6, a five-seater electric SUV - had started to take-off and its growth prospects were strong.

Read more: Everything you need to know about NIO

It has made material progress since then. The company now has three electric cars on offer after launching a larger SUV named the ES8 and, most recently, the five-seater coupe named EC6 that was released only in July this year. It is now delivering over 12,000 cars each quarter compared to just 100 before it listed, and although it is in the red the company has moved closer toward profitability and generated its first positive cashflow.

Let’s explore some of the reasons why NIO shares have rallied this year in more detail.

NIO delivers gross profit and positive cashflow

NIO reached a major milestone when it posted its results for the second quarter (Q2) of 2020. The company’s gross margin and cashflow turned positive for the first time and it reported its smallest-ever quarterly operating loss in its six-year history.

The gross margin in Q2 was 8.4% - a huge turnaround from -12.2% in the first. This was primarily down to three reasons. The first was increased production, with scale lowering costs. The second was lower costs of production thanks to a fall in the price of certain materials. And the third was down to the hit taken from the voluntary recall of batteries in Q2 2019 not repeating.

NIO deliveries are increasing

NIO’s deliveries have reached a new level in 2020. It delivered 12,206 cars in Q3 2020, building on the record sales reported in the previous quarter. That comfortably beat the company’s quarterly target to sell between 11,000 to 11,500 cars.

NIO has sold 26,375 vehicles in the first nine months of this year, more than double what was sold in the same period last year. This has been driven by increased sales of its older models and the introduction of new ones, with the EC6 set to provide the momentum after shipments started in late September – which was a record sales month for the business. All-in-all, NIO has now sold over 58,000 cars in its lifetime.

NIO is expected to make further progress in the second half

Having reached those key milestones and with deliveries increasing, NIO’s main job is maintaining the momentum going forward. Deliveries should continue to rise in the coming quarters and not waver as they did throughout 2019, and this should allow it to not only grow its topline but move closer toward profitability and maintain positive cashflow.

NIO has said it expects to report revenue of between RMB4,047.5 million and RMB4,212.3 million in Q3, between 8.8% and 13.3% higher than Q2 – but the fact it delivered 706 cars more than its top estimate means it is likely to comfortably beat that goal when it releases its quarterly results later this year.

To add further perspective, estimates compiled by Reuters suggests NIO will continue delivering double-digit quarter-on-quarter growth in revenue for the remainder of 2020, and that will be able to maintain and improve its positive gross margin.

Brokers are bullish on NIO

Brokers currently have an average Buy rating on NIO, however the stock is now trading significantly higher than its average target price of $18.34. The speed of the increase in value is why the stock is rated a Buy but trading higher than its target price. Most brokers have simply not had a chance to review the sharp increase and update their rating.

Still, the signs are positive. The average target price has been steadily rising in recent months, from just $5.52 in July to $11.02 in August and $16.47 in September. Considering the company’s performance and outlook, it is likely this figure will rise further in the near future.

More importantly, the most recent reviews of the stock have been positive. JPMorgan upgraded the stock to Buy from Hold earlier this month – and raised its target price from just $14 to $40 – demonstrating there is belief that the rally has much further to go. The $40.00 price target is based on valuing NIO’s enterprise value at 3x predicted 2025 sales. The bank said this was a ‘meaningful’ discount to its 5.1x 2025 sales valuation on Tesla to reflect the fact the US carmaker owns all its technology in-house, whereas NIO outsources the most crucial part of the business, including manufacturing.

China’s electric vehicle market to step up a gear

NIO exclusively sells in China, which is by far the largest electric car market in the world. Just under half of all electric vehicles that have ever been sold are in China and the country still accounts for a similar-sized slice of new sales.

Sales of electric vehicles were hit in the first four months of 2020 as China tried to get a grip on the pandemic, but they have bounced back since then. The China Association of Automobile Manufacturers says three million electric vehicles should be sold each year by 2025 – more than double the 1.2 million sold in 2019. To put that into further perspective, only 2.1 million electric vehicles were sold around the entire world last year.

Sales will also be supported by the Chinese government’s decision to keep its national and local subsidy schemes for electric vehicles until 2022. The government had planned to begin phasing out the subsidies last year but reversed the decision after sales plunged in the second half (H2) of 2019.

NIO, as a homegrown business solely focused on China, is naturally set to benefit from this growth but it is facing stiff competition. The space is cramped but NIO is targeting the SUV market where it believes there is little competition. However, one of its only rivals in the space happens to be Tesla, which already sells far more electric cars in China than NIO. Plus, it also trails other major domestic car firms like BYD – which is reported to have sold over 14,000 vehicles in August alone.

Is now the time to buy NIO shares?

NIO has stepped it up a gear in 2020. Deliveries are on course to consistently increase going forward and the fact it has made a step toward profitability and generated some cashflow so early on is impressive. This has understandably fuelled a remarkable rise in its share price.

The key question is whether the sharp increase means NIO is now overvalued, or whether there is further room for the stock to rise. Importantly, shares have risen in response to a material improvement in performance and not fuelled by hopes or prospects for the business, and some brokers believe the rally has much further to run.

The fact the company has delivered positive gross margins and cashflow means investors will be measuring future performance on these metrics, and NIO will have to demonstrate it can deliver this sustainably over the long-term. This makes them key figures to watch, alongside deliveries, going forward.

Cashflow is particularly important. NIO had RMB11.2 billion worth of cash and equivalents at the end of June, equal to around $1.6 billion, but admits this will only last it 12 months at best. That means it either needs to generate enough cash to be self-sufficient within the next year or be forced to tap investors or the banks for more money.

Its decision to abandon plans to build its own $650 million factory in Shanghai last year and continue to outsource manufacturing to JAC Motors has allowed it to step toward profitability at a much quicker pace. However, it also highlights the fact that NIO is not a car manufacturer, but a designer and lifestyle brand that differs very much from the likes of Tesla.

How to trade NIO shares

You can trade NIO’s ADRs by speculating as to whether you think share prices will rise and buy (go long) or, if you think they will fall, sell (go short) using either CFDs. Get started by following these easy steps:

1. Create an IG trading account or open My IG to your existing account
2. Enter the name of the stock, ‘NIO, or its ticker, ‘NIO.N’, in the search bar and select it
3. Choose your position size
4. Click on ‘buy’ or ‘sell’ in the deal ticket
5. Confirm the trade

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