Investors in Nio (NIO -0.85%) have been on a roller-coaster ride in 2021, but most of that ride has been downhill. As of the close of trading on Friday, shares of the Chinese electric vehicle (EV) company were down by around 54% from its highest-ever trading price of $66.99 in early January and off by more than 37% year to date.
The reasons for that deep plunge are myriad. Among other issues, investors are concerned about the rapidly spreading omicron COVID-19 variant and its possible impact on the global economy, ongoing semiconductor chip shortages, increasing U.S. regulatory scrutiny on foreign companies, and fears that a debt default by massive Chinese property developer Evergrande Group might set off a financial crisis in Nio's home market.
In addition, Nio's vehicle shipments declined sharply in October. All that, in combination with rising competition from both Chinese EV rivals such as XPeng (XPEV), Li Auto (LI -12.84%), and BYD, and legacy automakers like Toyota Motor and Ford Motor Company, has put a damper on investor sentiment for the stock.
Despite these challenges, Nio has several things working in its favor that could make it a winner in 2022.
Image Source: Getty Images.
Concentrating on the two biggest EV markets
Nio is focused on rapidly expanding in China and Europe -- the two largest EV markets in the world today. According to International Energy Agency's 2021 global EV outlook, China and Europe are expected to account for 16.6 million to 25.3 million EVs by 2030. The EV industry stands to benefit significantly from the increasing focus that leaders in China and Europe are placing on reducing carbon emissions.
While it will continue to focus on China, Nio plans to eventually make half of its sales in foreign markets. In September 2021, it launched sales of its flagship SUV, the ES8, in Norway. That nation, the world's leader for EV adoption, should provide Nio with an easy entry point to the burgeoning European market. The company plans to begin selling its vehicles in Germany, the Netherlands, Denmark, and Sweden in 2022.
New models coming soon
Nio is gearing up to launch three new vehicle models and a separate mass-market brand in 2022. The company has disclosed plans to start shipping its new flagship ET7 sedan in March. During its annual Nio Day event on Dec. 18, management also unveiled the ET5, a midsize sedan (to be delivered starting September) priced to compete with the Tesla (TSLA -1.66%) Model 3. That affordability is expected to play a key role in driving ET5 sales.
Nio has not yet divulged details about the third vehicle it plans to launch in 2022. But these new models will help it compete more effectively with peers such as Xpeng and Li Auto.
A battery-as-a-service solution
Usually, an electric vehicle's battery pack accounts for a significant portion of its price. Nio, though, has been offering a battery-as-a-service (BaaS) subscription solution. Instead of paying in full for the battery pack up front, buyers pay less for their cars, then sign up for subscriptions under which they can regularly (and quickly) swap out their depleted battery packs with fully charged or upgraded ones. This service reduces range anxiety, and cuts the time one waits for one's vehicle to be fully charged from hours to a matter of minutes.
To make this business model successful, Nio has built a network of over 700 automated battery-swap stations across more than 150 Chinese cities, as well as over 600 "destination" charging stations and more than 3,000 individual public recharging units. The company has partnered with Royal Dutch Shell (RDS.B) to add 100 more battery-swap stations in China by 2025, and to start pilot projects in Europe next year.
The BaaS offering provides a recurring revenue source for Nio that extends across the lives of its vehicles. The company is also able to offer different types of battery packs (short range or long range) depending on a customer's immediate needs.
Resolving some manufacturing challenges
Nio delivered 10,878 vehicles in November, almost three times as many as it shipped in October, when the company had to reduce production volume to restructure and upgrade manufacturing lines in preparation for the launch of the new ET7 sedan. That temporary headwind seems to have been mostly resolved, considering that November was its best month yet for vehicle shipments.
Nio also reported that new vehicle orders hit an all-time high in October. A strong order book coupled with aggressive production expansion plans could enable the company to reach break-even in the coming quarters.
An attractive valuation
This year, Nio delivered 80,940 vehicles through the end of November, while XPeng delivered 82,155 and Li Auto delivered 76,404.
NIO PS Ratio (Forward) data by YCharts
While Nio's total was only slightly lower than Xpeng's, there is a significant difference in their forward valuation multiples. Nio is also trading at a significantly lower forward price-to-sales multiple than it was in early 2021.
Against the backdrop of improving fundamentals and a reasonable valuation, there's a good chance for Nio to enjoy a robust share price recovery in 2022.
