Nio Must Continue to Manage Elevated Expectations

Nio (NYSE:NIO) shareholders are discovering that it’s difficult to carry the weight of expectations. NIO stock is down about 11% in 2021. And for now, the bears appear to be in control. To be fair, Nio has been in a far worse situation. But this time investors expect more. And for Nio to reach the loftiest of the bullish projections, it has to raise its floor.

Given the company’s recent successes, that is not impossible, but it also shouldn’t be taken as a done deal. NIO stock has crossed the $60 threshold before. But, the stock failed to hold that impressive height. Nio bulls will claim this is because the air is leaving the electric vehicle (EV) bubble. I’m not so sure that totally accounts for investor sentiment at the moment.

The Privilege of Expectations

For those that have read my articles, I occasionally make reference to my affection for the National Football League’s Cleveland Browns.  The team has been “interesting” over the last few seasons; even if that hasn’t always been for the right reasons.

After years of a lot of losing, the team had half a season where they were trending upwards. A few new players later, the Browns were eyeing Super Bowl rings. And at first, the team didn’t live up to the hype. The Browns found out that the privilege of expectations can be a blessing or a curse.

If your eyes haven’t glazed over yet, let me bring this back to Nio.

It seems like a long time ago when I was drawing the “attention” of Nio bulls. They were less than thrilled that I said the company was a bankruptcy waiting to happen. But as the saying goes, that was then. Since an infusion of cash from the Chinese government, Nio has attained the Midas touch.

The company is on pace to deliver over 90,000 vehicles in 2021. Their battery-as-a-service (BaaS) program is a genuine innovation in a sector where the word gets thrown around too casually.

And as Nio enjoyed success, the EV bubble inflated largely due to a number of young upstarts entering the arena. Compared to them, Nio looked like a grizzled veteran.

But just because a sophomore isn’t a freshman doesn’t make them a senior. Nio is still a company with a lot to prove.

What Can Nio Do For An Encore?

If Nio wants to set a higher floor, there’s nothing better they can do, in my opinion, than to continue to strengthen its balance sheet. In its fourth quarter and full-year 2020 earnings report Nio reported a net loss in 2020 that was approximately 50% less than that of 2019.

This doesn’t mean that Nio will become free cash flow positive anytime soon, but if they turn this to a positive number in the next 12 to 18 months, it will give investors much more to be excited about. In late 2020, Nio president Lihong Qin stated his belief that the company could be profitable in the next one to two years.

Another potential catalyst would be if Nio successfully begins to sell vehicles in Europe. Qin has also indicated that expansion outside of China is one of the company’s goals in the next one to two years.

Is NIO Stock a Buy?

Well let’s put it this way. NIO stock is more attractive near $40 per share than near $60 per share. I’m not convinced that Nio will reach $60 again in the near future. Analysts give the stock a consensus price target of just under $50.

The narrative of the EV sector is still in its early chapters. Nio has earned its place in that story. And it will survive the sector’s inevitable growth and consolidation phase. But right now, investors are expecting more from the company. Until Nio shows that they can exceed those expectations, a $60 stock price will be a ceiling not a floor.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.