Morgan Stanley believes that despite NIO's conservative Q4 delivery guidance, vehicle gross margin is expected to improve significantly due to product mix optimization and economies of scale.

On November 26, Morgan Stanley issued a positive assessment of NIO's Q3 earnings report, noting that while the company lowered its Q4 delivery guidance to 120,000–125,000 units, vehicle gross margin is projected to reach 18%, highlighting continued profitability improvement.

The report stated that NIO's Q3 net loss narrowed to RMB 3.7 billion, better than Morgan Stanley's estimated loss of RMB 4.3 billion, primarily driven by a 4.4 percentage point quarter-over-quarter (QoQ) increase in vehicle gross margin to 14.7%. The company's Q4 revenue guidance of RMB 32.8–34.0 billion implies a 50–56% QoQ growth, suggesting a high single-digit increase in average selling price (ASP), supported by higher sales contributions from high-margin models like the ES8 and Ledao L90.

Analysts led by Tim Hsiao at Morgan Stanley noted that Q4 vehicle gross margin is expected to reach 18%, with non-vehicle business revenue and gross margin also improving QoQ. NIO's management reiterated its target of achieving non-GAAP breakeven in Q4, despite lower-than-expected delivery guidance.

The bank maintained an "Overweight" rating on NIO with a $9 price target, implying a 57% upside from current levels.

**Q3 Earnings Beat Expectations, Margin Improvement Notable** NIO's Q3 financial performance exceeded market expectations, with net loss narrowing to RMB 3.7 billion from RMB 5.1 billion in Q2. Vehicle revenue rose 19% QoQ, while deliveries increased 21% QoQ, though ASP saw a slight decline.

Morgan Stanley highlighted that vehicle gross margin improved to 14.7% in Q3 from 10.3% in Q2, surpassing its estimate of 13%. Analysts attributed this to economies of scale and higher margins from new models like the Ledao L90 and ES8, offsetting the impact of ongoing promotions. Overall gross margin rose 3.9 percentage points QoQ to 13.9%, exceeding the expected 10.9%.

**Conservative Q4 Guidance but Profitability Targets Unchanged** NIO's Q4 delivery guidance of 120,000–125,000 units fell short of Morgan Stanley's prior estimate of 150,000 units, implying average monthly deliveries of ~42,000 units in November and December, slightly higher than October's 40,000 units. Analysts suggested the conservative outlook reflects the recent suspension of trade-in subsidies.

The Q4 revenue guidance of RMB 32.8–34.0 billion implies a 50–56% QoQ increase, indicating a high single-digit QoQ rise in ASP. Morgan Stanley attributed this to product mix optimization driven by higher sales contributions from the ES8 and Ledao L90.

The report projects Q4 vehicle gross margin at 18%, up 3.3 percentage points QoQ, supported by economies of scale, supply chain cost savings, and higher sales of premium-margin models. Non-vehicle business revenue and gross margin are also expected to improve QoQ. NIO's management reaffirmed its non-GAAP breakeven target for Q4.

**2026 Outlook: 20% Gross Margin Target** Morgan Stanley noted NIO's optimistic outlook for 2026, with plans to launch three large SUV models—ES9, ES7, and Ledao L80—in Q2–Q3 2026 to support sales growth.

For gross margin, NIO aims to achieve 20% vehicle gross margin in 2026, leveraging supply chain efficiencies, economies of scale, and product mix optimization. Management expressed confidence in maintaining this target, citing gross margins above 20% for the ES6, EC6, and ES8, even with slightly higher promotional spending amid potential demand headwinds.

On cost control, NIO targets keeping R&D expenses at RMB 2 billion per quarter, with sales and administrative expenses maintained at 10% of total revenue. Morgan Stanley suggested 2026 could mark a non-GAAP profitability inflection point if these targets are met.

The bank emphasized that investors will closely monitor order backlogs and delivery ramp-up for the ES8 and Ledao L90, as well as the performance of upcoming models. These factors are critical for NIO to achieve scaled revenue and margin expansion in 2026.