Chinese automaker NIO (NIO) released first-quarter earnings last week, and the results were far from pretty.
The company posted a year-over-year revenue decline of 52.5%, while sales volume declined by half. And while the company reported a small profit in the fourth-quarter of last year, NIO’s profit slipped into negative territory, with margins declining to -13.4%. Though investors didn’t sell in droves when earnings were released Tuesday, the sell-off began Wednesday and continued through Friday.
But even so, Deutsche Bank analyst Vincent Ha remains bullish on NIO stock, maintaining a Buy rating and $8.90 price target, which implies over 200% upside from where the stock is currently trading. (To watch Ha’s track record, click here)
Ha points out that while profit plummeted, expenses actually decreased. The company reduced R&D spending by almost 30% since last year, and SG&A expenses by more than 30%. But even with the expense decreases, NIO’s first-quarter loss was higher than the analyst expected.
A primary reason for such a decline in sales is the recent pullback of China’s electric vehicle subsidy. In March, the government removed the subsidy in its entirety for vehicles with a range lower than 155 miles, while cutting it drastically for vehicles with a higher range. As a result, looking ahead to the second-quarter Ha says, “management cautiously expects a further slowdown in deliveries…” as geopolitical and macroeconomic events also play a role.
While the cut in subsidies remains a challenge, Ha is encouraged by the number of pre-orders of the NIO ES6. The analyst says the company has received over 12k pre-orders, with “production models [coming] off the mass production assembly line [Tuesday], and delivery..set to begin at the end of June.”
Ha notes that management is “confident that the ES6 will be competitive in the scalable, five-seat, mid-size, premium SUV segment vs. the internal combustion engine (ICE) versions of the Audi Q5, the BMW X3, and the Mercedes Benz GLC Class,” given its high performance and low maintenance cost, among other advantages. Ha says this is important, “considering that ES6 sales are a significant factor in the company’s outlook,” but the company has avoided “providing full-year volume guidance before it has more clarity on demand once delivery starts.”
All in all, NIO started off 2019 strong, with its stock rising 60% in the first three months. But since the beginning of March, shares are down nearly 70%. Yet, the Wall Street community is optimistic. TipRanks analysis of three analyst ratings shows a consensus Moderate Buy rating, with two analysts recommending Buy and one suggests Hold. The average price target among these analysts stand at $7.97, representing a 168% upside from current levels. (See NIO’s price targets and analyst ratings on TipRanks)