Citi downgrades Nio, saying red hot China EV play may have trouble challenging Tesla

Published Tue, Jan 12 20218:07 AM ESTUpdated Tue, Jan 12 20214:06 PM EST

(This story is for CNBC PRO subscribers only.) Shanghai-based Nio may not pose the threat to Tesla that many are expecting, according to Citi. The firm cut the red-hot electric vehicle stock to a neutral rating, saying Nio's new sedan is "good but not enough to make any critical changes from Tesla's challenge." The firm did, however, raise its target on U.S.-listed shares to $68.30, up from a prior forecast of $46.40. the new target is roughly 9% above where shares closed on Monday. On Saturday the company unveiled its first sedan , called the et7, which includes self-driving technology features that the automaker claims will surpass that of Tesla. Deliveries are set to begin in the first quarter of 2022, company founder and chairman William Li said at a launch event in Chengdu, China. Nio's et7 sedan can work with the company's new autonomous driving system that's built on Nvidia processing chips. The move prompted at least three Wall Street firms to raise their targets on the stock on Monday, including JPMorgan, which took its forecast to a Street high of $75. At one point on Monday Nio shares were up more than 13%, before ultimately closing 6.42% higher for the day. But Citi believes the new model will lead to sales of just 3,000 to 4,000 vehicles per month, and could be challenged in the future by any updates to Tesla's Model S vehicle. Additionally, a price drop in Tesla's Model Y could "create head-to-head competition to NIO's EC6 and potentially marginalize its monthly sales to 1-1.5k units," Citi analyst Jeff Chung wrote in a note to clients. Overall, Chung lowered his 2021 and 2022 shipment forecasts to 82,000 and 144,000 respectively, down from prior forecasts of 92,000 and 162,000. Still, the new forecast represents a jump from current production levels. For 2020, Nio said deliveries more than doubled from a year ago to 43,728 vehicles. Shares of Nio have surged 1,686% over the last year amid investor enthusiasm for electric vehicle companies. CNBC's Jim Cramer attributes part of the move to young investors on the hunt for the next Tesla, which has also outperformed with a more than 740% gain in the last year. "This has really captured the younger person: they trade this thing like a banshee," Cramer said Monday on CNBC's "Squawk on the Street." "People think Nio ... is the next Tesla, and the next Tesla has been probably something that's the greatest search younger people have embarked on, and they think they've found it in Nio," he added. At its event over the weekend Nio also announced an option for customers to pay for autonomous driving on a monthly basis. Analysts have noted that this represents a revenue channel not dependent on manufacturing. "We expect a potential re-rating if the company posts a sharp MoM recovery in Mar-21 or if the company's software earnings exhibit a strong margin upward trend," Citi's Chung said. Shares of Nio closed 1.05% lower on Tuesday. - CNBC's Michael Bloom and Evelyn Cheng contributed reporting.

Employees make checks at an inspection line during a media tour of the Nio Inc. production facility in Hefei, Anhui province, China, on Dec. 4, 2020.

Qilai Shen | Bloomberg | Getty Images

(This story is for CNBC PRO subscribers only.)

Shanghai-based Nio may not pose the threat to Tesla that many are expecting, according to Citi. The firm cut the red-hot electric vehicle stock to a neutral rating, saying Nio's new sedan is "good but not enough to make any critical changes from Tesla's challenge."