Wall Street analysts increasingly bullish on Nio stock after a 50% YTD drop

Investing.com -- Despite NIO Inc (NYSE:NIO) (HK:9866). seeing a sharp 50% year-to-date decline, Wall Street analysts are increasingly bullish about the company’s future prospects. 

Both Jefferies and Citi Research have expressed confidence in Nio’s ability to rebound, pointing to a series of upcoming catalysts that could drive a recovery in its stock price. 

These include improved financial performance, a promising pipeline of new models, rising sales volumes, and favorable industry conditions in China’s rapidly expanding new energy vehicle (NEV) market. 

While risks remain, both brokerages view Nio’s current stock price as an attractive opportunity for long-term investors.

A key factor behind the renewed optimism surrounding Nio is the upcoming launch of the L60 model on September 20, 2024, which has already generated positive feedback. 

Analysts at Jefferies view this launch as a significant near-term catalyst, “We estimate that there is about a 70% to 80% (or "very likely") probability for the scenario,” the analysts said.

This is expected to be driven by strong demand for the L60, combined with broader improvements in the NEV sector.

Citi Research, meanwhile, flags Nio’s improving financial performance as a primary driver of the company’s recovery. 

“We expect 3Q24 other revenue of Rmb1.86bn with negative GPM narrowed to -9.5% (from 2Q24’s -12.3%),” said analysts at Citi Research.

Additionally, Citi expects a 1% to 2% quarter-on-quarter increase in blended average selling prices (ASP), driven by a decline in incentives, an improved product mix, and scale efficiencies. 

These factors should push vehicle GPM to 13.3%-13.7%, leading to an overall blended GPM improvement to 11.5%.

Both Jefferies and Citi forecast strong sales growth for Nio in the coming quarters. 

“We forecast 4Q volume to keep improving to 83-85k units, up 32%-39% QoQ,” said analysts at Citi.

“We expect Nio to set 400-450k sales target for 2025E at a later stage,” Citi added.

Jefferies supports this view, noting that Nio is positioned to benefit from favorable policy and market trends as China continues to promote the adoption of electric vehicles. 

Both brokerages believe Nio’s expanding product portfolio, including the L60 and other upcoming models, will enable the company to gain market share from joint venture (JV) brands and competitors like Xpeng (NYSE:XPEV). 

As the sector bottoms out, Nio’s strategic positioning within the NEV market should allow it to capitalize on rising demand, particularly in China, where government policies are driving the shift towards sustainable transportation.

Both Jefferies and Citi view Nio’s current stock price as an opportunity. Citi highlights that Nio is trading at a 30-40% discount to its 2025E price-to-sales (P/S) multiple compared to Xpeng, presenting a potential arbitrage opportunity. 

Citi expects the valuation gap between Nio and Xpeng to narrow in 2024 and 2025, driven by sector tailwinds and Nio’s improving financial performance. Citi has set a target price of US$7.00 for Nio’s U.S. shares, based on a 1.4x 2024E P/S multiple, in line with its 1-year average.

Similarly, Jefferies uses a probability-weighted valuation methodology, factoring in Nio’s expected volume growth and long-term potential. Jefferies assigns 25%/50%/25% probabilities to its bull, base, and bear case scenarios, with the base case expecting net profit break-even by 2028.

The brokerage’s valuation model uses a weighted average cost of capital (WACC) of 18.7%, reflecting Nio’s risk profile with a beta of 2.4, and a long-term growth rate of 3.0%.

Both brokerages stress that Nio’s valuation has become more attractive after its YTD decline, making it a compelling option for investors looking to capitalize on the company’s potential for growth. 

As the broader NEV market continues to expand, Nio is positioned to be a key beneficiary, with its current discount offering an appealing entry point.

While the outlook for Nio is optimistic, both Jefferies and Citi outline several risks that could affect the company’s performance. 

These include the potential for operational delays in scaling production, stronger competition from both well established automakers and new entrants, and weaker-than-expected demand for Nio’s vehicles. 

Additionally, funding risks could emerge if Nio’s working capital position deteriorates, although Citi believes the company will not need to pursue refinancing in the short term due to expected improvements in revenue.

Another risk involves product quality. Any issues related to the design, reliability, or service of Nio’s vehicles could damage its reputation and hinder sales growth. Both firms note that Nio must continue delivering high-quality vehicles on time and at scale to meet its ambitious targets.

Despite these risks, both Jefferies and Citi remain confident in Nio’s long-term growth potential. The company is poised to benefit from sector-wide upgrades in China’s NEV market, where strong government support and increasing consumer demand for electric vehicles create a favorable environment for growth.