NIO shares dropped after the company posted great earnings on nearly all metrics. While the company didn’t post a profit, that is to be expected when a company like NIO is in the growth phase. The selling came from weak longs booking profits. As we take a closer look, this selling is a gift for those that understand the enormous potential in NIO shares.
NIO shares have been on a tremendous run this year and we don’t see any signs of this bull run slowing down. Our track record has been consistent and rewarding for our readers and subscribers. We said that NIO shares were a better bet than Nikola or Tesla, which you can read here. Then, when Goldman Sachs said to sell NIO, we said the smart play was to ignore Goldman Sachs, which you can read here. Now, after diving into earnings, there’s no reason to damper our bullish enthusiasm for NIO shares.
First up, here’s a little background info for those not familiar with NIO shares. NIO Inc. is a pioneer in China’s premium smart electric vehicle market. NIO designs jointly manufacture and sell smart and connected premium electric vehicles, driving innovations in next-generation technologies in connectivity, autonomous driving, and artificial intelligence.
NIO began deliveries of the ES8, a 7-seater high-performance premium electric SUV in China in June 2018, and its variant, the six-seater ES8, in March 2019. NIO officially launched the ES6, a 5-seater high-performance premium electric SUV, in December 2018 and began deliveries in June 2019. NIO officially launched the EC6, a 5-seater smart premium electric Coupe SUV, in December 2019 and plans to commence deliveries in 2020.
Here are the highlights of Q2 earnings.
- Q2 Non-GAAP EPS of -$0.15; GAAP EPS of -$0.16 beats by $0.10.
- Non-GAAP EPS of -RMB1.08 beats by RMB0.78.
- Revenue of $526.4M (+146.5% Y/Y) beats by $24.46M.
- Gross margin was 8.4%, compared with -33.4% in Q2 2019.
- Quarterly deliveries of the ES8 and the ES6 were 10,331 vehicles, compared with 3,553 vehicles in Q2 2019.
- Vehicle margin was 9.7%, vs. -24.1% in Q2 2019.
Why the sell-off? One reason is the company expects to deliver 11,000 to 11,500 vehicles in the third quarter. Some market participants were expecting bigger projections for Q3; however, NIO is limited by production capacity for Q3. This won’t be an issue for Q4. William Bin Li, founder, chairman, and chief executive officer of NIO, said:
“The current constraints on the productions will be lifted in the near future and we are confident that our production capacity can meet the accelerated demand of our models.”
In the EV space, it’s all about scalability and we have to give Elon Musk and Tesla credit, they have executed brilliantly. The good thing is that the stock market is forward-looking and investors in NIO shares will now be looking out to Q4 for significant production gains. The fact remains that NIO is a long-term growth story and NIO shares are in the early innings of its bull run.
NIO Shares Bull Case
Here are just a couple reasons to be bullish on NIO shares.
One, NIO’s 50,000th mass-produced vehicle roll off the production line at the JAC-NIO Advanced Manufacturing Center in Hefei, only 783 days after the first one coming out. This is the same time-frame it took Tesla to produce its 50,000th vehicle.
Second, NIO has perfected battery-swap technology for its vehicles. Nio completed its 500,000th battery swap in May 2020 and appears to have mastered the concept. The company currently has 138 stations in 62 cities in China and is able to swap a battery in 3 minutes.
Third, Tesla doesn’t allow its batteries to be swapped. China is encouraging battery-swapping according to Miao Wei, Minister of Industry and Information Technology
“The ministry will encourage battery-swap technologies to alleviate mileage anxieties and introduce more new energy vehicles into public-service sectors including buses, street sweepers, and logistics vehicles.”
Fourth, NIO is set to announce the price and technical configurators of its third production model, the NIO EC6, at the forthcoming Chengdu Motor Show 2020, and afterward start delivering the vehicle in September. Unveiled at the NIO Day Event held on December 28, 2019, the EC6 is deemed as the coupe version of the ES6 SUV. This is another catalyst that will drive shares of NIO stock higher over the next few weeks.
Fifth, it is highly unlikely that China will allow a foreign company to dominate its market for EVs. Just like with smartphones, Apple may have a presence, but Chinese brands Oppo, Vevo, Huawei, OnePlus hold major market share in the Chinese market. In China, local brands are generally more preferred by the average consumer.
Sixth, NIO buyers are eligible for subsidies from the Chinese government whereas Tesla is not. The subsidy to purchase EVs under 300,000 yuan only applies to manufacturers that use swappable batteries.
Seventh, the key to understanding Goldman Sachs is not listening to its analysts, but watching what the firm does with its own capital. As of March 30th, Goldman Sachs owned 10.8 million NIO shares.
Eighth, just like Tesla, many speculated that Tesla would go bankrupt and run out of cash. Investors no longer have to worry about NIO shares as the company ended June 30th with $1.6 billion in cash.
NIO Shares Bottom Line
Currently trading with a market cap of $15 billion and $1.6 billion in cash, there’s a lot to like with NIO shares. Mainly that Tesla has a $262 billion market cap, meanwhile NIO is on the same trajectory as Tesla. We believe its market cap will keep climbing as it closes the gap with Tesla. As we have said before, NIO is on pace to become the Tesla of China and William Li the Elon Musk of China. With 15% of NIO’s float short, we look forward to the shorts getting crushed by William Li, just like Elon crushed the shorts in Tesla. Buckle up and grab your popcorn. It’s going to be an exciting ride.
As always, good luck to all (except the shorts)!
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Disclosure: We have no position in NYSE:NIO or any of the securities mentioned. We wrote this article ourselves and it expresses our own opinions. We are not receiving compensation for it. We have no business relationship with any company whose stock is mentioned in this article. Insider Financial is not an investment advisor and does not provide investment advice. Always do your own research and make your own investment decisions. This article is not a solicitation or recommendation to buy, sell, or hold securities. This article is meant for informational and educational purposes only and does not provide investment advice.