News & Analysis

Why are Wall Street analysts still bullish on EV stock NIO?

09 Apr 2021 | by: Kirsteen Mackay

Why are Wall Street analysts still bullish on EV stock NIO?

Wall Street analysts remain highly positive on the electric vehicle (EV) sector. Despite stocks like NIO Inc (NYSE:NIO) and Xpeng Inc (NYSE: XPEV) losing momentum, the analysts are still shouting ‘buy’.

NIO’s share price falters

The NIO share price soared 1,210% last year on optimism surrounding its rising order book and flashy product launches. Tipped as a major competitor to Tesla, many believe NIO will be a long-term survivor of the 2020 EV mania.

But it’s not so rosy a story into 2021. NIO shares have fallen 27% year-to-date.

If 2020 optimism was anything to go by, we’d have expected NIO to rally this week as Tesla’s excellent Q1 deliveries surpassed analyst expectations. But the response was muted.

Analysts are now pushing a target price for NIO of around $61 a share. That’s 57% up from today’s price, or up 14% from the beginning of the year. What is this price hike based on? Although NIO delivered more vehicles than expected in Q1, it’s clearly facing challenges ahead.

A cynical investor might wonder are the analysts simply following the herd. EV stocks enjoyed a sensational rally in 2020 and the green revolution expected from the Biden administration is keeping this narrative going. But there are several headwinds facing these stocks and it’s not simply overvaluation.

Microchip supply crisis

The worries concerning access to microchips with global stock shortages has been well documented in recent weeks. So, it begs the question, how can analysts stay so positive on EV stocks like NIO, if the outlook is less than favourable?

The microchip shortage could cause production delays, which it’s already doing to long-established car manufacturers such as General Motors (NYSE:GM) and Ford (NYSE:F). And this leads to inflationary concerns. It makes sense that microchip prices will soar if demand outweighs supply. Then the already tight EV company margins will be annihilated.

This week NIO warned it’s likely to miss its Q2 production target of 7,500 cars due to the ongoing chip shortage. It already missed its targets in Q1 for the exact same reason.

At a recent event celebrating its 100,000th premium electric vehicle, CEO William Li said:

“We still face difficulties in achieving our production goal, the issue remains tough in the second quarter, but it will affect our production only in the near term,”

Interest rate hikes

And it’s not just semiconductor shortages spooking the markets. Interest rate worries are another concern suppressing tech stocks.

The FED previously said they’d keep rates near zero until 2024. But improving recovery in the labour market along with growth in the services and factory sectors led markets to start pricing in a rate rise.

Nevertheless, the latest FED statement should help alleviate worries for a bit longer.

Preparing for a placing

On the other hand, could there be a more nefarious reason for analyst optimism? What if these analysts are simply keeping NIO sweet with buy recommendations, so that their banks are given preference when it comes to NIO’s next share placing?

This may seem like conspiracy nonsense, but it wouldn’t be the first time such a thing has happened. Big banks have been accused of investor manipulation before.

As a 2017 Wall Street Journal article explained:

“You can’t be a brand ambassador if you have a sell rating”.

And in 2003, 10 US securities firms paid a record $1.4 billion to settle government charges that included the issuance of overly optimistic stock research to investors. This was designed to curry favor with corporate clients and win their lucrative investment-banking business.

Will NIO fundraise?

Whether NIO will fundraise seems inevitable. The R&D costs to an automaker are exponential. Consequently, funds can dry up very quickly and the need to raise more is common.

NIO’s rival Li Auto (NASDAQ:LI) launched a convertible bond sale this week, raising $750 million. The Li Auto share price fell on the news. It also drove down other EV stocks including NIO.

Furthermore, NIO started this year more expensive than Tesla, in relation to estimated sales. While NIO was trading at approximately 16X 2021 sales, Tesla was trading at 12X 2021 sales.

But are the vehicle sales projections achievable or are Wall Street analysts asleep at the wheel while their model estimates drive on autopilot?

The analysts were arguably late to the party, when it came to promoting Chinese EV’s so why should investors trust them now?

According to some, the sheer size of the Chinese market share could be the reason. Some believe it presents a $5 trillion market opportunity over the next decade. And it won’t be as easy for foreigners like Tesla to make sustainable inroads here as it will be for their Chinese counterparts.

Considering NIO’s poor Q1 and expected Q2 results, no sign of chip supply recovery soon and investor interest waning, why are analysts still bullish?

Surely NIO would have to pull off a miracle to beat sales targets and revive investor interest. Missing one quarter is acceptable, but two becomes scary and certainly discourages disciplined investors from staying the course.

With negativity mounting, it seems NIO may have to resort to another share placing. At least that will keep those receiving fees happy.

Valuethemarkets.com, Digitonic Ltd (and our owners, directors, officers, managers, employees, affiliates, agents and assigns) are not responsible for the content or accuracy of this article. The information included in this article is based solely on information provided by the company or companies mentioned above.

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

  • Kirsteen Mackay does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.
  • Kirsteen Mackay has not been paid to produce this piece by the company or companies mentioned above.

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