Investing.com – Despite NIO Inc (NYSE:) (HK:) seeing a sharp 50% decline since the beginning of the year, Wall Street analysts are increasingly optimistic about the company’s future prospects.
Both Jefferies and Citi Research expressed confidence in Nio’s ability to recover, pointing to a series of upcoming catalysts that could drive a recovery in its share price.
These factors 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 companies view NIO’s current share price as an attractive opportunity for long-term investors.
The main factor behind the renewed optimism surrounding Nio is the upcoming launch of the L60 on September 20, 2024, which has already generated positive feedback.
Analysts at Jefferies see this launch as an important catalyst in the near term, saying: “We estimate there is a 70% to 80% probability (or ‘highly likely’) of this scenario.”
This growth is expected to be driven by strong demand for the L60, coupled with broader improvements in the new electric vehicle segment.
Meanwhile, Citi Research points out that NIO’s improved financial performance is the main driver of the company’s recovery.
“We expect other revenue in Q3 2024 to be around CNY1.86 billion with negative gross profit margin narrowing to -9.5% (from -12.3%) in Q2 2024,” analysts at Citi Research said.
Additionally, Citi expects a 1% to 2% quarter-on-quarter increase in blended average selling prices (ASP), driven by lower incentives, improved product mix, and volume efficiencies.
These factors should push the vehicle’s GPM to between 13.3% and 13.7%, resulting in an overall GPM improvement of 11.5%.
Both Jefferies and Citi expect strong sales growth for NEO in the coming quarters.
“We expect sales volumes to continue improving in the fourth quarter to 83,000-85,000 units, up 32%-39% q-o-q,” Citi analysts said.
“We expect NIO to set a sales target of 400,000 to 450,000 units by 2025 at a later stage,” Citi added.
Jefferies supports this view, noting that NIO is positioned to benefit from favorable policies and market trends as China continues to promote EV adoption.
Both companies believe that 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:).
With the sector at a low point, NIO’s strategic position in the new EV market should allow it to capitalize on growing demand, especially in China, where government policies are driving a shift toward sustainable transportation.
Both Jefferies and Citi see Nio’s current share price as an opportunity. Citi notes that Nio is trading at a 30-40% discount to its 2025 price-to-sales multiple compared to Xpeng, representing a potential arbitrage opportunity.
Citi expects the valuation gap between NEO and Xpeng to narrow in 2024 and 2025, driven by sector tailwinds and NEO’s improved financial performance. Citi has set a US$7.00 price target on NEO shares, based on a 1.4x P/S multiple for 2024, in line with its one-year average.
Similarly, Jefferies uses a probability-weighted valuation methodology, taking into account NIO’s projected business growth and long-term potential. Jefferies assigns probabilities of 25% to 50% to 25% for the upside, downside and baseline scenarios, with breakeven expected by 2028 at baseline.
The company’s valuation model uses a weighted average cost of capital (WACC) of 18.7%, which reflects NEO’s risk profile with a beta of 2.4 and a long-term growth rate of 3.0%.
The two companies stressed that NIO’s valuation has become more attractive after falling so far this year, making it a compelling option for investors looking to capitalize on the company’s growth potential.
As the new electric vehicle market continues to expand more widely, Nio is positioned to be a major beneficiary, with its current discount providing an attractive entry point.
While the outlook for NEO is bullish, both Jefferies and Citi identify several risks that could impact the company’s performance.
These challenges include the possibility of operational delays in scaling up production, strong competition from established automakers and new entrants, and weaker-than-expected demand for NIO vehicles.
Furthermore, financing risks could arise if NEO’s working capital position deteriorates, although Citi believes the company will not need to pursue refinancing in the near term due to the expected improvement in revenues.
Another risk is product quality. Any problems with the design, reliability or service of NIO’s vehicles could damage its reputation and hamper sales growth. The companies say NIO must continue to deliver high-quality vehicles on time and at scale to meet its ambitious goals.
Despite these risks, both Jefferies and Citi remain confident in NIO’s long-term growth potential. The company is expected to benefit from the upswing in China’s electric vehicle market, where strong government support and growing consumer demand for electric vehicles are creating a favorable environment for growth.