NIO Stock at $10: Is It Closer than It Seems?

NIO (NYSE:NIO) stock’s recent performance has been very impressive. The stock has gained close to 74% in the last eight trading days alone, which brings its YTD gains to 66%. NIO stock lost 37% of its value in 2019. After the steep surge in the stock price, the company announced a proposed offering of 60 million American Depository Shares today.

The EV subsidy rollback, battery recalls, weaker deliveries, and a high cash burn rate marred the stock’s prospects last year. Meanwhile, 2020 started on a negative note amid COVID-19 and weak demand. Now, the stock seems to be on an upward trajectory.

NIO started its upward march after it announced a 7 billion yuan financing deal with the Hefei government in April. The deal eased investors’ concerns regarding the company’s survival and liquidity issues. Things started improving for NIO. The demand came back in the Chinese auto market starting in April. NIO recorded solid growth in its April and May deliveries. The company’s results and guidance were also encouraging. These developments led many Wall Street analysts to turn positive on the stock. Bank of America, J.P. Morgan, and Goldman Sachs upgraded the stock in the last month.

What future catalysts could propel NIO stock even more? One catalyst would definitely be the continuation of all the positives. A continued rebound in China’s auto sales and EV sales would be positive. In the long term, the growing awareness of EV benefits and China’s drive to increase the NEV (new energy vehicles) share as a total of the auto market should drive NIO and other EV-makers’ volumes.

Strong delivery growth, which the company showed in April and May, would also help the stock. While the cash raised would help the company for some time, along with deliveries, it needs to turn margin positive so that it can sustain its operations from cash generated internally.

As deliveries rise, the fixed costs per unit will decline, which will help NIO’s margins. As guided by the company, a positive gross margin in the second quarter and a double-digit gross margin by the end of the year would certainly be a positive catalyst for the stock.

In addition, the Chinese government will likely keep supporting domestic players as long as they show promise. The EV push is clear from the exception made in subsidies to include NIO. Notably, China extended subsidies on EVs to 2022. However, only the cars with prices less than 300,000 yuan are eligible for availing subsidies. Tesla (NASDAQ:TSLA) also reduced the prices of its Model 3 standard variant below this threshold to pocket these subsidies. NIO’s car prices are higher than the limit. However, NIO qualified based on its battery swapping technology.

None of the catalysts mentioned above are very difficult to achieve for the company if the macroeconomic factors favor it. Therefore, NIO stock could push to $10 by the end of this year based on these positives. Investors need to remember that things could go south just as quickly. A non-recovery in auto demand or a strong second coronavirus wave could put an abrupt end to the budding rally. Other concerns, including the delisting of Chinese entities, could also keep pressuring the stock.