NIO assembly line

NIO stock gained 16.7% yesterday and has now risen almost 60% from its 52-week lows that it hit earlier this year. The stock has recovered sharply from its lows even as we haven’t seen similar upwards price action in other EV (electric vehicle) stocks.

However, despite the rise, NIO stock is down over 40% for the year. The sell-off is not limited to EV stocks alone, and Apple, which is the best-performing FAANG stock of the year, has also lost over 25%. Berkshire Hathaway chairman Warren Buffett bought the dip in Apple in the first quarter of 2022 and in all likelihood might be adding more stocks in the current quarter.

What’s the forecast for NIO stock and is it still a good buy despite the recent spike?

Why is NIO Stock Rising?

To begin with, we should understand why NIO stock has been rising. On a macro level, there has been a rally in all US-listed Chinese stocks like Alibaba, NIO, and Baidu. After China signaled that it is done with the tech crackdown and would support the overseas listing of Chinese companies, we saw upwards price action in almost all Chinese stocks.

Also, as the lockdowns ease in China, markets expect NIO’s production volumes to rise in the second half of the year. More recently, the stock spiked after a teased a new model on the website.

Meanwhile, NIO had missed earnings estimates in the first quarter and its net loss of $281.2 million was wider than what markets were expecting. Also, its gross margins fell to 14.6% as compared to 17.2% in the previous quarter.

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The company has been hit by supply chain issues due to the global chip shortage and the lockdown in some parts of China. In its earnings release, NIO said, “To quickly recover from the COVID-19 impact and fulfill the growing market demand, we have been working closely with supply chain partners to ramp up the production capacity and accelerate the vehicle delivery since the beginning of June.”

Last year, NIO announced an agreement with its production partner JAC Motors to double the annual production capacity to 240,000 vehicles.

NIO Still Looks a Good Buy: Here’s Why

Despite the recent surge, NIO stock still looks like a good buy. Firstly, the company has tacit support from the Chinese government which sees the EV industry as a key constituent of its “Make in China 2025” program. Secondly, the company has built a strong brand in the premium EV markets.

Also, as the company launches new models and enters newer markets, it would see a boost in sales. NIO does carry the risk of delisting in the US, like other Chinese companies. However, it has more than offset the risk by opting for a listing in Hong Kong and Singapore.

NIO’s cash position is also quite healthy and it had $8.4 billion of cash and cash equivalents at the end of March which can take care of its near-term cash burn and investments. From a valuation perspective also, NIO looks attractive with a next-12 months EV-to-sales multiple of 2.64x.

Unlike Tesla, where Wall Street is quite divided, most brokerages believe that NIO is a good stock to buy. Of the 34 analysts covering the stock, 32 have a buy or equivalent rating while two have a hold rating. None of the analyst has a sell rating on the stock. NIO’s median target price of $30 implies a 61% upside from these price levels.

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