NIO: 3 Catalysts For A Major Rebound

NIO (NYSE:NIO) saw a decent year over year increase in deliveries for the month of April, but the company's delivery monthly volume dropped again below 10 thousand units, which is a concern only in the short-term. On the positive side, the electric vehicle company achieved a 74% sedan delivery share last month and the company just started deliveries of the EC7 coupe SUV. With NIO's shares languishing, I don’t believe that the company’s delivery potential is properly reflected in NIO's valuation. I see three catalysts (2 short term, 1 longer term) that could drive a fundamental revaluation of NIO's delivery prospects!

Comparison of NIO's April delivery performance to its top EV rivals

NIO delivered 6,658 electric vehicles in April, showing a year over year growth rate of 31.2%. However, last year’s April results were suppressed due to supply chain issues so the delivery benchmark was low in the year-earlier period. NIO's deliveries fell below 10 thousand units again in April as the company adjusted its production lines and transitions to sedans and it was the first time since January that the company's deliveries fell below this psychologically important threshold.

By far the best delivery performance was achieved by Li Auto (LI) which delivered 25,681 electric vehicles in April, showing a massive 516.3% year over year increase. For reasons explained here, I continue to see Li Auto as top value for EV investors.

XPeng (XPEV) reported another month of declining year over year delivery growth. Of all three EV manufacturers, NIO had the lowest monthly delivery volume and Li Auto the highest. However, NIO's sedan production is ramping up and the company is launching new models soon which could bump up NIO's delivery growth rate again in the coming months.

(Source: Author)

Two catalysts: growing sedan delivery share, new EV product launches

One of the most significant business drivers for NIO in the last year has been the ramp of sedan products like the ET7 and ET5 which both launched last year. NIO has steadily ramped up production of its sedans at the expense of SUV production, however. As a result, NIO's sedan delivery share has increased again to 74% in April and I believe the sedan share could grow to 80% by the end of FY 2023. Electric vehicle sedans have become more popular in China in the last year which explains NIO's aggressive ramp. A ramp in sedan deliveries is tapping into this demand and could potentially reignite investor interest in NIO's shares going forward.

(Source: Author)

The second catalyst for a potentially higher valuation relates to new product launches. NIO has started to deliver the EC7 in late April, a five-seater coupe sport utility vehicle which could drive delivery growth in the coming months. At the Shanghai auto show in April, NIO also debuted the new ES6 sport utility vehicle as well as the new ET7 flagship sedan. Deliveries for the new models are expected to begin in May 2023. NIO's new flagship ES8 sport utility vehicle is projected to see the beginning of deliveries to customers in June. New product launches could be a powerful catalyst for NIO's delivery growth, especially as the company's sedan line-up grows.

3rd catalyst for an upside revaluation

After years of fine tuning production lines and growing its product portfolio, NIO is finally coming close to break-even... which I believe would be an event of great significance for the EV company. NIO is expected to be profitable in FY 2026 (consensus view), but it could potentially achieve break-even earlier if sedan deliveries continue to ramp up and the monthly production/delivery volume returns to 10 thousand units. Strong demand for sedan EVs, new EV launches and scale could help NIO get there quickly.

NIO is expected to lose $0.31 per-share in FY 2024, so there is even a possibility, in my opinion, that the EV company comes very close to break-even as soon as next year. Investors would likely reward NIO with a higher valuation multiplier if they see the EV company finally posting profits.

NIO’s valuation

I can’t help but like NIO’s valuation at this point. NIO’s shares are currently trading at $8.15 which gives the electric vehicle start-up a low P/S ratio of 0.78X and a market cap of approximately $13.8B. NIO is expected to generate by far the largest revenues ($17.6B) of all three manufacturers next year. NIO achieved a significantly higher market cap during the pandemic and while the valuation at that time may have been inflated, I believe NIO has revaluation potential if the company executes on its sedan ramp.

Risks with NIO

The biggest commercial risk for NIO is a slowdown in delivery growth, a slowing ramp of sedan production, and declining vehicle margins. Of all these risk factors, I believe the first one, slowing top line and delivery growth, posts the biggest risk to NIO because it could potentially push the break-even year further out into the future.

Final thoughts

NIO saw 31.2% year or year delivery growth in April and Li Auto once again beat the EV competition regarding delivery performance. Due to strong demand for electric vehicle sedans, NIO continues to see a ramp in its sedan delivery share. New product launches, such as the new EC7 and ES6 could be a boost to NIO's delivery growth in the months ahead. NIO currently has the lowest P/S ratio in its industry group, and the EV company faces up to three important catalysts (2 short term, 1 long term): (1) NIO’s sedan delivery share continued to ramp up in April signaling a transformation to a less SUV-centric EV maker (2) NIO is launching new products which could add to delivery growth in the coming months and (3) NIO is rapidly approaching its break-even year. For those reasons, and because NIO's P/S ratio indicates relative undervaluation, I will remain long NIO!