Stocks to buy

It seemed natural for shares of Chinese electric vehicle maker Nio (NYSE:NIO) to correct after surging from $2.11 in March 2020 to a high just below $67 in January — a gain of more than 3,000% in less than 10 months. Additionally, factors like the chip shortage and regulatory headwinds in China negatively impacted investor sentiment. So far this year, NIO stock is down around 30%.

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However, I believe that current levels are attractive for accumulation. NIO stock seems positioned for a strong rally in the coming years. And I would not be surprised if shares take out their previous highs in the next few quarters.

Nio Seeing Strong Growth in Its Home Market

Overall auto sales have slowed in China, and much of the rest of the world, due to the continued shortage of computer chips crimping production. However, Chinese electric vehicle makers are still poised to benefit from spectacular growth.

That’s because China has set ambitious targets for sales of new energy vehicles (NEVs), which include battery-powered and hybrid electric vehicles. By 2025, the Chinese government expects 20% of new car sales to be new energy vehicles. By 2030, Chinese automakers estimate NEV sales will make up 70% to 90% of market share.

According to Cui Dongshu, secretary general of the China Passenger Car Association, China’s NEV sales accounted for close to half of the world’s NEV sales in the first seven months of 2021. And Fu Bingfeng, executive vice chairman of the China Association of Automobile Manufacturers, said in June that he expects NEV sales in China to grow more than 40% annually for the next five years.

This growth pathway spells huge opportunity for Nio, which was the highest-producing EV startup in China for the month of September, beating out competitors Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI). Nio sold 10,628 electric vehicles last month, ahead of the company’s guidance despite the ongoing chip shortage. This represented a 126% increase from a year ago.

For the third quarter, Nio doubled the number of vehicle deliveries year over year to 24,439 vehicles, which also came in ahead of expectations. Once the temporary chip shortage headwind subsides, it’s likely Nio’s vehicle deliveries will accelerate further.

Another factor that will support sales growth is the launch of Nio’s ET7 sedan in early 2022. The company expects to sell 50,000 units next year.

Nio’s introduction of battery-as-a-service is also worth noting. As the company explains it: “Enabled by vehicle-battery separation, battery subscription and the chargeable, swappable and upgradable batteries, NIO BaaS is a breakthrough innovation in both technology and business model.”

The program launched in August 2020, with the goal of providing an improved power service experience to its fast-growing user base. This summer, Nio announced its NIO Power 2025 battery swap station deployment plan. By the end of 2025, Nio plans to have 3,000 battery swap stations in China and another 1,000 around the world. BaaS provides Nio with another avenue for revenue and should help the company create loyal customers.

Nio Is Expanding Internationally

China is clearly the biggest market for Nio, but the company is expanding internationally as well.

At the end of September, Nio launched the ES8 SUV in Norway. The launch of ET7 in the country is scheduled for next year, and the ET7 is expected to debut in Germany toward the end of 2022.

This is likely to be just the beginning, as Nio founder William Li has said the company is eyeing launches in four more European countries in addition to Germany. These new markets should help accelerate growth in vehicle deliveries in 2022 and beyond.

Another development that’s likely to have a positive impact on Nio’s international growth plans is the pilot launch of Mobileye’s autonomous taxis and ride-hailing services in Germany and Isreal next year. Mobileye, Intel’s (NASDAQ:INTC) self-driving vehicle technology unit, struck a deal with Nio to use its SE8s for the program.

This program should provide Nio with more exposure and credibility in European markets. And given Mobileye’s plans to bring self-driving cars to the masses by 2025, a successful pilot program could result in further collaboration between the companies.

The Bottom Line on NIO Stock

With the rapid growth in deliveries, Nio saw vehicle margin expand significantly in the second quarter to 20.3%, compared with 9.7% in the same quarter of 2020. It seems likely key margins will improve further with operating leverage. And significant investment in research and development is likely to keep Nio ahead of the curve in an increasingly competitive market.

Nio has ample financial headroom for growth in China. Nio’s joint manufacturing agreement with Jianghuai Automobile Group has an annual production capacity of 240,000 vehicles, positioning the company to meet the growing demand for electric vehicles in China. What’s more, Nio is making moves internationally to expand its market.

Overall, with several positive developments and ambitious growth plans, NIO stock looks attractive. Strong upside in shares is likely in the coming quarters.

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

Faisal Humayun is a senior research analyst with 12 years of induswith compared with 9.7% in the second quarter of 2020try experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with focus on the technology, energy and commodities sector.