Stock Market

Analyst ratings can be a valuable investment research tool, but you may not want to lean on them entirely to make investment decisions. A good example is with shares in China-based electric vehicle maker Nio (NYSE:NIO). Analysts remain bullish on NIO stock.

However, based on the latest developments with the company, it is hard to see why. Nio’s financials have been underwhelming lately. Delivery numbers have been moving in the wrong direction, and Nio has made little progress getting towards profitability.

Add in questionable prospects for a growth resurgence later this year, and (in my view) it is hard to come to the same conclusions the Wall Street analyst community has reached.

That said, don’t take my word for it. Let’s dive into the sell-side’s bull case, and my bear case, so you can decide for yourself whether shares are a buy, sell, or hold.

Most Analysts Have an Optimistic View

If you are looking for the analyst community’s overall view about a stock, there are plenty of online resources that can provide this. A highly informative such resource is Marketbeat, which aggregates and tracks stock ratings from analysts.

We’ll use their data to gauge current analyst sentiment for this stock. According to Marketbeat, analyst consensus for NIO stock comes in at  “moderate buy.” Out of 12 analyst ratings, seven rate it a “buy” and five rate it a “hold.” No analysts give NIO a “sell” rating. Analyst price targets average $18.98 per share, or around 122% above current prices.

Many of the more recent ratings have been downgrades. For example, on March 2, analysts from both Barclays and JPMorgan downgraded NIO from the equivalent of “buy” to the equivalent of “hold.”

Analysts from both firms have become more cautious about the stock, in light of the maker’s disappointing quarterly results.

Despite these lackluster results, which included both lower-than-expected sales and wider-than-expected losses, many analysts have not wavered from the bullish side. Largely, because of confidence in the above-mentioned resurgence in growth will happen.

Why I Disagree

Analysts still bullish on NIO stock are cutting the company some slack for its poor recent fiscal performance. In their view, results will materially improve starting in the second half of 2023. That’s the view of Morgan Stanley’s Tim Hsiao. Hsiao has stayed bullish on NIO, giving shares a $16.10 per share price target.

The analyst believes that the launch of new vehicle models, plus the continued rollout of Nio’s battery swap station network, will enable sales growth to re-accelerate. Hsiao also believes these new, higher-margin vehicle models will enable Nio to raise its overall margins in the quarters ahead.

However, as I have argued in prior coverage, I believe there’s much to suggest that this bull case won’t pan out. Analyst consensus calls for Nio to generate around $12.1 billion in revenue this year, a 69.4% increase compared to 2022.

Between the end of China’s EV subsidies, as well as increased competition from Tesla (NASDAQ:TSLA), and from locally based EV makers, it may prove difficult for Nio to sell enough EVs in the latter half of this year, in order to meet/beat this forecast.

The Takeaway

Based on NIO’s recent stock price performance, I’m clearly not the only one skeptical about the company’s prospects for 2023. Since the latest earnings release, the stock, after briefly finding support between $10 and $12.50 per share, has slid back to single-digit price levels.

While I disagree with the bull case for Nio, I’ll admit that there is substance to it. Despite many headwinds, the company may just well end up successfully differentiating itself in the crowded field of Chinese EVs. This will allow Nio to report high sales growth and improved margins for the full year 2023.

If you dive deeper in the bull case and come to this conclusion, buy a small, speculative position in Nio.

However, unless subsequent news shows an increased chance of this “growth resurgence thesis” playing out, I’m going to maintain my bearish view on NIO stock.

On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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