Is NIO Stock a Good Investment for the Long-Term?

Investors in Chinese EV group Nio (NIO) have certainly been hit hard by the market volatility of late. Shares of NIO stock have dropped to the $25 level from nearly $65 per share just a year ago.

This sort of decline is due to a number of key factors. First, most high-growth stocks in sectors such as the EV space have been hit hard due to macro headwinds. Rising inflation has led to surging bond yields and expectations of hawkish monetary policy. As interest rates rise, the future earnings of companies like Nio become discounted considerably from the current earnings.

Additionally, chip concerns and geopolitical concerns out of China have hit NIO stock hard. This company is, for better or worse, focused on the Chinese EV market. While China remains a high-growth economy, and a space I’m bullish on over the long-term, investors seem to have sought the safety of established capital markets over the past year.

Indeed, I’m bullish on Nio stock, and continue to be, despite these recent declines. Here’s why I think NIO stock could be a great long-term pick, despite this weakness.

NIO Stock is Attractively Valued

Nio’s valuation has gone from certainly concerning at its previous levels to one which investors can wrap their heads around. At the time of writing, this stock trades at 7.5 times sales. However, with an annual growth rate well in excess of 100%, this multiple should decline rapidly in the years to come. That is, as long as this momentum continues.

Compared to Nio’s peers in the EV sector, this valuation makes sense. Looking at Tesla (TSLA), for example, Nio begins to look like a bargain stock.

I think the key driver of assessing this company’s valuation comes from the growth analysis around this company. Consensus forward estimates are for Nio to increase revenues by 75%. This is slightly below Xpeng (XPEV), but more than Tesla. 

Much of this growth comes from the makeup of the Chinese EV market. NEV (New Energy Vehicle) sales in China might surpass 5 million units in 2022. Moreover, sales of EVs are expected to comprise around 30% of the country’s auto market. This forecasts Chinese EV sales reaching 7 million units by 2025.

For Nio, a leader in the Chinese EV space, this is a big deal. The company is rolling out its new model lineup. The launch of the ET7 full-size sedan this year will be one to watch. This launch will be followed by the much anticipated ET5 compact sedan. 

Nonetheless, there are some headwinds in the Chinese market worth noting. Chinese subsidies have been lowered this year. Additionally, there are talks among Chinese officials about removing these subsidies by 2023.

However, the Chinese government appears to continue to favor its home-grown EV talent. Nio is the golden child of China, and as such, is a stock I’m bullish on for pure battery EV growth in Asia.

NIO Grows Amid Competition

Nio is taking direct aim at China’s luxury EV market for cars and SUVs. Besides Xpeng and Tesla, its competitors in the country include BYD (BYDDF), whose hybrid and EV sales are on the rise.

In addition to Chinese automakers, several U.S. automakers are also trying to enter this market. Ford (F), Volkswagen (VWAGY), and General Motors (GM) already make electric SUVs for the Chinese population.

Despite all these factors, Nio continues to grow its sales. This revenue growth has persisted despite these competitive headwinds, suggesting consumer preference for Nio’s lineup within China.

It is estimated that hybrid and fully-electric EVs will form 90% of all new auto sales in China by 2030. That would represent growth from around 10% since last March, showcasing immense growth opportunities.

Nio is also looking for international expansion. During the previous year, it started operations in Norway. It further plans to enter five other European countries by 2022. 

The company may also double-up its production capacity in Hefei, China. This is expected to be around 240,000 vehicles per year by mid-2022.

What Analysts Say About NIO Stock

As per TipRanks’ analyst rating consensus, Nio is a Strong Buy. Out of 10 analyst ratings, there are 10 Buy recommendations. 

This stock has an average NIO price target of $60.86, implying an upside of 153.5%. Analyst price targets range from a high of $87 per share to a low of $34 per share.

Bottom Line

Right now, Nio is a prominent EV player in China. This company offers tangible growth plans and features a strong product line. However, shares of this company may come under pressure due to increased operational costs and tough competition. 

That said, there’s reason to like Nio’s prospects over the longer-term. The secular growth catalysts driving Nio are strong, and China appears to be Nio’s market to win. For investors thinking long-term, this is a growth company worth taking a shot at, at this valuation.

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