Shares of NIO Inc. NIO, informally dubbed as the Tesla TSLA of China, has had an amazing run on the bourses lately. This China-based electric vehicle (EV) specialist has rallied 359.8% over the past three months, breezing past the industry’s gain of 9.6%.

Of late, the EV market is on a roll with stocks including Tesla, Nikola NKLA and Workhorse WKHS registering astronomical gains. With EV trends getting hotter day by day, it seems that investors are worried about missing out on betting big on the same.

Making Sense of the Stock’s Insane Surge

Encouraging EV market fundamentals are indeed the major catalyst behind the company’s incredible run. Commercial viability of EVs, both in terms of affordability and charging infrastructure, stricter emission rules as well as favorable government regulations are brightening the prospects of environment-friendly vehicles. NIO is a rising player in the industry and is currently riding the EV wave. Further, China’s intense push for EV vehicles is a major booster for NIO.

While the COVID-19 outbreak weighed on the firm’s first-quarter vehicle deliveries, stabilization of the pandemic in China led to rebound in sales in the second quarter. NIO’s focus on technology and service helped it in boosting sales. Despite the fact that the coronavirus pandemic impacted sales volumes of major auto biggies on a year-over-year basis, NIO delivered 10,331 vehicles in the second quarter that exceeded the firm’s guidance and increased 191% from a year ago. Its premium ES6 and ES8 models are enhancing the firm’s prospects. NIO delivered 3,740 vehicles in June, setting a new monthly record.

NIO’s funding deals have breathed new life into the stock. Indeed, the firm has come a long way since the start of 2020, when NIO was facing a cash crunch and was on the brink of filing for bankruptcy amid the COVID-19 eruption in China. However, after securing around $1 billion in new financing from China’s economic development authorities in April, risks of insolvency are no longer pertinent. NIO has managed to shore up its cash position via private placements and fund injections by strategic investors. China-based internet behemoth Tencent Holdings has been making investments in the EV maker over the past few years. Last month, it increased its stake in NIO to 15.1%. Cash infusion from investors and increasing efforts to expand the company’s sales network are starting to yield benefits. 

NIO’s battery swap technology is a game changer and provides an edge to the firm over peers. The company claims that a battery pack can be replaced in its vehicles in about three minutes. The technology — which is part of NIO’s BAAS (Battery-as-a-Service) strategy — helps to save time when charging an EV and alleviates range anxieties. A recent press release of the company stated: “As of May 26, 2020, NIO Power has completed over 500,000 battery swaps, becoming one of NIO’s most well-received power services.”

Headwinds Stay But There’s a Glimmer of Hope

While the company has secured funding and managed to stay afloat, its balance sheet is quite weak. Reverse leverage and high debt of the firm in comparison with cash and cash equivalents play spoilsport. The firm should ensure prudent utilization of funds via focusing on expansion strategies and the launch of vehicles to boost long-term prospects.

While the firm’s ES6 and ES8 models are gaining wide popularity, NIO is still in the nascent stage of diversification. It does not even have a truck in its vehicle lineup, unlike many of its peers including Tesla and Nikola. Continuous streak of losses and lofty valuation have also been major headwinds. NIO currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Nonetheless, green vehicles are the future and are likely to take away the share from the gas guzzlers. Rising EV adoption and support from the Chinese government are poised to take NIO to greater heights. Late last year, the company unveiled the new EC6 model, which is likely to be a competitor to Tesla’s Model Y. The vehicle will offer long-range driving capabilities of more than 380 miles on a single recharge and acceleration from 0 to 60 mph in around 4.7 seconds. If the EC6 debut turns out to be successful and manages to catch people’s attention, it will certainly bolster NIO’s sales.

So, while the stock may witness a temporary correction, NIO is in the game for the long run, considering rising EV penetration in China. The country targets EV sales to account for 25% of total car sales by 2025. NIO is surely one of the companies that can help China achieve this aim, given that it continues to witness an uptick in deliveries, wisely invest capital and focus on expanding vehicle lineup.

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