Buy the dip in NIO stock before it rides much, much higher

Shares of Chinese Chinese Manufacturer of Electric Vehicles Nine (NYSE:NIO) slipped on Tuesday after the company reported mixed numbers in the fourth quarter that did not impress investors. The NIO share fell by about 12% in response.

This dip is an excellent buying opportunity.

Delivery numbers from NIO are currently slightly uncomfortable due to one-off noise, including the Chinese lunar New Year holiday and shortages of semiconductor chips due to the Covid-19 pandemic. However, this noise will pass.

The underlying fundamental trends of NIO meanwhile remain very healthy. It enables the company to scale delivery and production, expand globally, maintain high average selling prices and increase revenue and profit margins.

Because of its strong fundamentals, it is likely that the NIO stock will double test the recent low of around $ 45, hold the level and then move back to $ 70.

Net net, buy the dip in NIO!

Here’s a deeper look:

NIO share earnings look good

The NIO share fell 10% after the company reported Q4 earnings. Why? Because deliveries could not impress.

Deliveries in February fell 23% month-on-month after a series of consecutive gains of more than months. To make matters worse, management said at the conference that production volume in the second quarter of 2020 would have to decrease by 7,500 vehicles per month – compared to 10,000 vehicles per month. global shortage of semiconductor chips.

This is not good news.

But here’s the thing: it’s temporary headwinds.

The delivery in February is due to the Chinese New Year holiday in the month, during which consumers tend to buy big tickets. That holiday is now over. In March, deliveries will go into ‘disaster’ mode again.

Meanwhile, the scarcity deficit has a longer impact here. But not for so long. Factories around the world are already resuming full production. By summer, this shortage of chips will be old news. NIO’s production volume will scale down to 10,000 vehicles per month by early in the third quarter.

The bad news in NIO’s earnings report is therefore short-term in nature. Meanwhile, there were many good ones. Average selling prices have risen, indicating that demand (not discounting) is driving growth. Vehicle margins rose three points in a row. Gross margins increased by four points. Adjusted loss narrows. European enlargement remains on track. ET7 discussions exceeded expectations.

All in all, this business is still shooting at all cylinders, except for a few short-wind headwinds that will succeed.

Look at the Double Dip

Because the underlying fundamental business trends remain favorable, this decline in the NIO share will be short-lived.

I am looking for NIO stocks to retreat and test the recent low of $ 44, which it feared amid rising prices last week. This will be a “double dip” test. If the NIO stock passes this test and holds the recent low, it is a reasonable sign that the recent sell-off in NIO shares is coming to an end.

I suspect NIO stocks will pass this “double dip” test. This is because the tariffs have calmed down, while NIO’s earnings report emphasized that the business is still shooting at all cylinders today.

To that end, I consider the sale in NIO shares to be the ninth turn. It will end. Binnekort. And at prices that are not much lower than where the stock is trading today.

NIO stock up to $ 70?

As a result of the company’s earnings report, I revise my estimates at NIO higher, despite the decline in NIO shares.

This is because I was impressed with a few things in the report.

First, the delivery of 23% in February consecutive impressions. Two years ago, February deliveries fell 56% month-on-month. All in all, a 23% drop is therefore very resilient.

Second, ASPs are strong. They recorded about $ 58,000 in the quarter. This is 18% year-on-year and 7% quarterly. Because of this ASP power, I review my long-term ASP targets higher.

Third, margins perform above expectations. Vehicle and gross margins both rose higher than 15% during the quarter. They are fast closing at 20% – and NIO is far from reaching any scale. Long-term, I think gross margins could rise to the top 20s.

Consequently, my modeling now suggests that by 2030, NIO will earn about $ 6 in earnings per share. Based on a 25X earnings multiple and an annual discount rate of 10%, this means a 2021 price target for NIO share of $ 70.

I think this is where stocks will trend after falling about $ 44.

In short on NIO stock

NIO’s earnings report was hit by short winds. That headwind will pass. If they do, the company’s long-term headwinds – strong demand, healthy ASPs, new car launches, global expansion, and so on – will be back in focus, driving NIO shares to new highs.

As a result, I still consider NIO shares to be one of the best growth stocks to buy today.