NIO Is The Deep Value Play Nobody Wants To Talk About

Shares of NIO (NYSE: NIO) have declined recently by as much as 33% during the past quarter, a reaction driven by market's indigestion of the latest quarterly financial results from the company.

While there are some justifiable reasons to worry, understanding what is happening behind the scenes may be helpful to investors. Analysts still see double-digit upside potential from today's prices in the stock, and markets are sure to weigh in as well in how they perceive this company relative to its American counterparts.

Understanding the implications attached to investing in a 'growth' company such as NIO can help investors stomach these swings, and following these metrics can help shareholders keep a gauge in progress toward steady profitability.

Scary Times, Higher Upside

When companies become in trouble, a new breed of capital typically piles in to save the damsel in distress. In the case of NIO, deep-value investors are coming from institutions supporting the company through these rough patches. 

Wells Fargo & Company (NYSE: WFC) and Point72 - a major player in the hedge fund industry - have upped their positions in NIO during the past quarter by 163% and 38%, respectively.

A significant vote of confidence from these highly sophisticated investors should not be ignored by those trying to emulate the same returns. And those who don't trust these players' true intentions can lean on NIO analyst ratings.

These ratings point to a consensus price target of $12.76 a share, delivering a potential upside of 16% from today's prices. According to NIO's stock chart, this stock has reached the high teens and low twenties to trade comfortably; the initial price target may reflect a more conservative view of the company's future.

Markets are sharing the same optimistic view coming from these institutions, as they are valuing the company's future sales above those of its American competitors. Despite a 14.8% revenue decline over the year, markets still reward NIO with a price-to-sales ratio of 2.6x.

Names like General Motors (NYSE: GM) and Ford (NYSE: F) are trading at cheaper P/S multiples of 0.27x and 0.29x, respectively. Some may argue that this only makes NIO the more expensive alternative. However, there is a more significant message behind the valuation.

Markets, including the mentioned institutions, are willing to pay a premium for NIO's sales over competitors, as there must be some expectations for higher growth or quality in this name that cannot be found elsewhere.

The more profound losses and narrower margins during the quarter have brought on more interest from investors to support NIO through what will turn out to be a bump in a much bigger road.

A Play out of Amazon's Book

Amazon.com (NASDAQ: AMZN) got its way in terms of market share by doing two things: undercutting competitors on pricing and delivering a quicker/better service. This caused them to suffer steep losses along the way, gaining giant steps toward larger market share as a result.

Now that the Chinese economy is set to rebound after the government implements various stimulus packages, NIO is gearing up to cut through the competition and take market share, which is seen in the following figures.

NIO's margin per vehicle has declined from 16.7% a year ago to today's 6.2%, worrying at first. Good intentions behind it? You bet. Margins per vehicle decreased as a result of two significant factors.

Research and Development (R&D) expenses rose by roughly 57.1% during the year, which underpins the massive intention to develop a superior product via heavy investment.

Lithium prices have stabilized from their rampant runs in 2020-2022, so the cost per vehicle at NIO has also allowed for some flexibility. Management is discounting prices, passing their gains to consumers to win new business rather than retaining the short-term marginal profits.

In short, focusing on developing a better product/experience while simultaneously reducing prices is genius. While in entirely different industries, NIO is looking to build a brighter future for its investors using the Amazon way. Analysts covering the Chinese auto market may have noticed.

XPeng (NYSE: XPEV) is a young and promising auto maker serving the Chinese market. While its stock has followed a similar path to NIO's, markets have an entirely different view of the company's future. 

Analysts are placing a consensus price target of $16.1 a share for XPeng, which would translate into a net downside of 14% from today's prices, talk about contrast to NIO's upside.