Why the positive momentum for Nio Stock is likely to continue

<p>Nine (NYSE: NIO) shares touched a 52-week low of $ 1.19 during the fourth quarter of 2019, as the downside was triggered by cash burning and financing issues. However, as the company tackles the challenges, nine shares have witnessed positive momentum. Even with the steady growth of the new coronavirus pandemic in China, the population has increased higher. Currently, Nine is trading at around $ 3.60 per share – and I think there is more upside potential in the coming quarters.

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From a macroeconomic perspective, the People’s Bank of China believes that the Chinese economy will quickly return to potential growth. Green shoots are already visible in China’s automotive sector. In fact, the China Automobile Manufacturers Association has reported a 1% growth in car sales for April 2020 from 1.98 million vehicles in April 2019.

In addition, another important development is that China has extended the new energy carrier subsidies and tax breaks to the fiscal year 2022. In addition, China recently injected 2.7 billion yuan into battery charging infrastructure. This development could potentially accelerate sales of electric vehicles as growth creeps back into potential GDP.

China’s sales of electric vehicles still account for 5% of total car sales. With that said, the government is focusing on electrified car sales to increase to 25% with FY2025. Although China is close to this goal, EV companies have strong growth visibility. And Nine can benefit from this development.

In April 2020, Nio reported a growth of 180.7% compared with the previous year. That being said, this can only be an early indication of potential turnaround sales. If vehicle deliveries remain strong in the coming months, the Nio share is well positioned to develop higher.

Several company-specific triggers

The biggest relief for Nio has been the agreement with strategic investors to invest 7 billion yuan in Nio China. This cash infusion gives the company great financial flexibility to invest in the launch of new models, as well as vehicle research and development that can be accelerated.

Another important stock trigger is the company’s focus on reducing costs and improving operational efficiency. The company expects a positive gross margin before the second quarter of 2020. In addition, the goal at the end of the year is to increase the gross margin to double-digit figures. If this goal is achieved, I see that the nine shares will trend higher during the year.

However, a potential challenge is to maintain strong growth in vehicle sales volumes in addition to cost reductions. Especially at a time when the car sector is crawling back towards recovery. Nevertheless, launches of new vehicles from the company can compensate for this challenge.

The company launched the all-new ES8 in April 2020, which has almost 188 improvements over the previous model. Furthermore, the company will start delivering the EC6 SUV in September 2020. So, given the cash infusion, Nio can accelerate the expansion of sales networks. And the positive effect will be visible in the coming quarters.

Investors will point out that intense competition in the industry could be a potential headwind. In March 2020, Tesla (NASDAQ: TSLA) sold 10,160 vehicles in China, which is the company’s highest monthly sales ever in the country. In addition, Ford Motors (NYSE: F) also has ambitious plans for China in the EV segment.

All in all, competition can affect growth and margins. However, the market is large enough to absorb multiple players.

My final view on Nio Stock

As the Chinese economy gradually creeps back to normal, the automotive sector has shown early signs of recovery. And as consumer confidence increases, I remain optimistic about a continued recovery for the sector.

With ample liquidity and launches of new models, Nio also has a good position for growth. In addition, efforts to improve operational efficiency are likely to yield results in increasing gross margins. Nine still have a long way to go to positive free cash flows. However, investors will be positive about the Nine shares as long as margins continue to improve.

The nine-share has risen higher by 219% from the 52-week low of $ 1.19. However, long-term investors may still consider new exposure at current levels. I see more juice in the current rally.

Faisal Humayun is a senior research analyst with 12 years of industry experience in credit research, equity research and financial modeling. Faisal has authored over 1,500 share-specific articles focusing on the technology, energy and raw materials sectors. At the time of writing, he had no position in any of the above-mentioned securities.