NIO Stock Will Outperform Peers in Near Term

By Senad Karaahmetovic

Morgan Stanley analyst Tim Hsiao has weighed in on the recent Nio (NYSE:) stock outperformance with shares up 10% in June vs MSCI Overseas China Index which is up only 2%.

The analyst “blames” the relative outperformance on the nearing margin through, among other things.

“NIO’s 1Q gross margin of 18% (-2.7ppt QoQ) surprised the market on the downside last week, and we think another 3-4ppt sequential contraction in 2Q is likely. However, investors look to have moved past margin concerns with most questions now focused on volume trajectories by models. We believe that if the company can report a solid sales bounce of 11-13k in June, this should help NIO restore investor confidence,” Hsiao told clients.

Moreover, the analyst says investors are likely encouraged as Nio’s “strong line-up provides better visibility and predictability now, which is likely to appeal to investors amid current volatility.”

“Even if its new models don’t generate positive cash flow in the short term, we think its enhanced model bandwidth across segments (sedan, SUV, crossover) and attractive pricing will appeal to NIO’s addressable market, boosting its competitive position and growth outlook into 2023. This is also critical to NIO’s financing capability and bargaining power in the supply chain,” Hsiao added.

Overall, the analyst sees Nio stock outperforming in the near term relative to other EV startups.

“We believe shares of leading EV startups will move in tandem on a 12-18 month horizon; NIO has been a laggard but should see this reverse: While the long-term growth prospects of EV startups are likely to diverge, we don’t expect this to emerge in the nearer term. As such, the stock performance is likely to hinge on marginal operational improvements and market expectations, where we gauge NIO lagged peers in 1H,” Hsiao concluded.

Similarly, BofA analyst Ming Hsun Lee reiterated a Buy rating on Nio stock after a conference call with management.

“We reiterate our Buy rating on NIO for its strong model pipelines with volume sales outperformance in 2H22 and attractive valuation,” Lee said in a separate note.

Nio shares are up over 4% in pre-market Friday.