What happened

Shares of Chinese electric-vehicle maker NIO (NYSE:NIO) were lower at midday on Tuesday amid a broader sell-off of automotive and related stocks on continued concerns about the effects of a global shortage of semiconductors.

As of noon EDT today, NIO's American depositary shares were down about 6.1% from Monday's closing price.

So what

NIO was just one of many automakers that saw its U.S. listed shares trading lower on Tuesday, as investors digested the likely effects of a prolonged shortage of automotive semiconductors. Tight chip supplies have already forced a number of automakers, including NIO, to cut back production despite strong global demand for new vehicles. 

But not everyone is feeling bearish on the Chinese electric-vehicle upstart. In a note released on Monday, Deutsche Bank analyst Edison Yu raised his margin estimates for NIO in light of the company's better-than-expected first-quarter earnings report last week.

A dark blue NIO ES8, a big electric luxury crossover SUV.

Sales of NIO's flagship ES8 have been strong since the company upgraded the big SUV's range and technology last year. With more buyers opting for longer-range battery packs, NIO's gross margins are growing more quickly than expected. Image source: NIO.

Yu said that while he and his team still expect NIO to deliver about 95,000 vehicles in 2021, they now believe that its revenue will be higher than their previous forecast given the company's stronger-than-expected average selling prices in the first quarter, which in turn will boost margins. 

Accordingly, Yu is now forecasting a full-year gross margin of 20.3%, up 2.5 percentage points from his earlier forecast, and a loss of $1.25 per American depositary share. 

Now what

What's driving that margin improvement? CFO Steven Feng told auto investors last week that more buyers opted for longer-range battery packs and the NIO Pilot driver-assist system, boosting average transaction prices and NIO's profit per vehicle sold. 

CEO William Bin Li acknowledged that NIO's gross margins are running higher than expected at this point in the company's growth plan. He said that this extra cash will be invested in user services and future technology, rather than cutting prices to chase added market share.

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