Why It's Finally Time to Buy Nio Stock

With fresh COVID-19 restrictions gripping China, expectations from Nio (NIO -5.35%) had nose-dived in recent weeks. Nio is one of the dominant players in China's hot electric vehicle (EV) market, and the company had to suspend operations at a couple of factories last month as lockdowns were imposed.

Fearing Nio's production and deliveries to take a beating, investors dumped the EV stock -- Nio shares lost nearly 33% value in just one month through Nov. 9. One day later, Nio proved its critics wrong.

The EV manufacturer beat third-quarter revenue estimates and sees significant growth in car deliveries in the coming months. And Nio's growth plans are even bigger. So if you've been watching Nio stock plunge this year but haven't pulled the trigger yet, it's finally time to buy the EV stock.

Backed by 29% higher deliveries, Nio generated roughly $1.8 billion in revenue in Q3, up 32.6% year over year. High battery costs, however, continue to be a chink in the armor, and that hurt Nio's vehicle margin and gross margin yet again in the third quarter.

Data source: Nio financial statements.

There's a glimmer of hope here as well, though: Nio's third-quarter margins were relatively flat sequentially, meaning they didn't deteriorate further, unlike what the markets expected. In other words, the raw material supply shortage that has been a major overhang on Nio's stock for several quarters could now be mostly behind it.

The biggest takeaway, though, is Nio's outlook for the fourth quarter, which should allay fears about the company's growth. And Nio has big plans beyond 2022.

Stepping on the gas

After delivering 31,607 vehicles in the third quarter, Nio expects to deliver anything between 43,000 and 48,000 vehicles in the fourth quarter. Now that's a hugely encouraging outlook, given the production loss Nio suffered during the latest COVID lockdowns. Earlier in November, Bloomberg reported Nio to have lost production and deliveries worth roughly 7,000 and 5,000 units, respectively.

Nio's delivery outlook, however, suggests the company is on track to hit record deliveries in the months of November and December. Nio's newly launched midsize sedan, ET5, can take much of the credit for this growth.

CEO William Bin Li pointed out how Nio has seen strong foot traffic in stores since the launch of ET5 in September, and he expects this car to support a "substantial acceleration" of the company's revenue growth in Q4. He also said Nio is "working closely with supply chain partners to accelerate production and delivery" to meet "growing user demand and shorten the wait time."

Indeed, the wait times for some of Nio's models have already dropped by about a couple of weeks, according to the latest report from China-based new energy vehicle-focused website, CnEvPost.

ET5 could be a game changer for Nio, as the car already made it to the top 10-selling premium sedans list in China in October. Some months ago, William Li even projected ET5 sales in China to overtake BMW 3 Series within a year. The gasoline-powered BMW 3 Series is currently among the top-selling premium sedans in China.

Yet ET5 isn't the only electric car Nio is banking on for growth.

What makes Nio stock a compelling buy now

Nio is planning to launch five new models in 2023, is still eyeing a mass-market brand, and expects its gross margin to hit 20% to 25% next year if battery costs fall.

The company has a lot of cash, so it has the leeway to invest billions of dollars in the research and development of new models. That's what the company plans to do to remain a prominent player in the world's largest EV market, China, even as it expands its footprint in Europe. Europe is also the only international market Nio has ventured into so far.

The markets may expect Nio to grow even faster, but Nio's confidence in delivering a record number of vehicles and growing its revenue by 75% to 94% in the fourth quarter despite macro headwinds is nothing to sneeze at. That alone should reinstate investors' faith in this EV stock that has slumped so dramatically to prices last seen more than two years ago.