NIO's autonomous driving upgrades could narrow its valuation discount, while sales remain the key near-term variable

Overview

This report focuses on NIO's autonomous driving strategy and its potential impact on valuation. Following discussions with NIO's senior vice president of autonomous driving, Morgan Stanley believes that upgrades to NIO AD and NWM 2.5 could help NIO enter China's top tier of autonomous driving companies and reinforce its existing design and configuration advantages. However, the report also emphasizes the need to await data feedback in 2H26 to validate the actual results.

Core views

The core view is that NIO's autonomous driving competitiveness comes not only from algorithm upgrades, but also from its systems-engineering capabilities spanning the data loop, fleet scale, in-vehicle computing power, chips, and software toolchain. If next-generation software can couple intelligent driving with the chassis domain and reduce latency, NIO may differentiate itself from automakers that rely relatively heavily on supplier solutions. From a short-term trading perspective, stock performance remains primarily influenced by sales, ES9/ES8 models, and 2Q results; over the medium to long term, the focus is on whether the autonomous driving discount can be narrowed and whether software subscriptions can translate into recurring revenue driven by installed units.

Analysis framework

The report uses company management interviews, product and algorithm roadmap analysis, autonomous driving data-loop analysis, vertical integration cost-efficiency assessment, and a probability-weighted valuation framework. The valuation assigns 25%, 50%, and 25% weights to bull, base, and bear scenarios, respectively, and uses key assumptions of a 17.8% WACC, a 2.4 beta, and a 3.0% long-term growth rate.

Methodology notes

• Valuation methodsProbability-weighted scenario valuation

  Weighted bull/base/bear scenarios

  The report assigns weights of 25%, 50%, and 25% to the bull, base, and bear scenarios, respectively, to reflect the possibility of improving or deteriorating macro prospects and industry competition.

• Valuation methodsModelWare

  Morgan Stanley ModelWare framework

  Unless otherwise stated, the report's forecast metrics are based on the Morgan Stanley ModelWare framework and incorporate Refinitiv consensus estimates.

• Technical analysisAutonomous driving data loop

  Golden data and collective fleet intelligence

  NIO believes that collecting data uniformly would incur high costs, so since 2020 it has focused on scarce, high-information-density “golden data” and used idle computing capacity across its fleet to improve data efficiency.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• NIO Inc. (09866.HK)

  Core covered security

  Strengths

  NWM 2.5 upgrade, improved autonomous driving adoption, three-layer algorithm stack, fleet data loop, vertical integration, and potential software subscription revenue.

  Weaknesses

  Near-term performance remains highly dependent on vehicle sales, ES9/ES8 performance, and 2Q results; the effectiveness of autonomous driving still requires validation through 2H26 data feedback.

  Comparison

  The report believes that if intelligent driving is integrated with the chassis domain, NIO may differentiate itself from competitors that rely on supplier solutions and narrow its valuation discount relative to autonomous driving start-ups.

  Risks

  Sales below expectations, insufficient efficiency improvements, slower automotive industry sales growth weighing on valuations, and intensifying competition.

• NIO Inc. (NIO.N)

  ADR mapping for the same company

  Strengths

  The Hong Kong target price is derived from the ADR target price using an HKD/USD exchange rate of 7.8, and the investment thesis is consistent with the company's fundamentals.

  Weaknesses

  Subject to differences in the ADR and Hong Kong dollar exchange rate, liquidity, and market risk appetite.

  Comparison

  It is the same issuer as 09866.HK but a different listed security.

  Risks

  Exchange-rate volatility, valuation differences between overseas-listed securities, and shared company-specific fundamental risks.

Key data

• Stock ratingOverweightMorgan Stanley's fundamental stock rating.
• Industry viewIn-LineThe industry view for the coverage universe is In-Line.
• Target priceHK$58.00Derived from the ADR target price using an HKD/USD exchange rate of 7.8.
• Closing priceHK$38.22As of June 29, 2026.
• Target price upside52%Relative to the HK$38.22 closing price.
• WACC17.8%Key valuation assumption.
• Long-term growth rate3.0%Key valuation assumption.
• Expected breakeven time2028The report expects net profit to reach breakeven in 2028.
• 2026e revenueRmb128,580.1mnNet revenue forecast shown in the table.
• 2028e EPSRmb1.90Based on Morgan Stanley's forecast.

Impact & implications

If NIO AD, NWM, and subsequent 2H26 software releases are validated by actual usage data, NIO may reduce the discount assigned by the market relative to autonomous driving start-ups and unlock recurring software subscription revenue potential. If sales and efficiency improvements are delivered simultaneously, the upside case supporting the Overweight rating becomes more complete; conversely, if sales fall short of expectations or efficiency improvements lack evidence, industry valuation pressure and intensifying competition could constrain share performance.

Risks

• New model launches or sales fall short of expectations.
• Operating efficiency improvements fall short of expectations.
• Slower automotive industry sales growth weighs on overall industry valuations.
• The actual effectiveness of autonomous driving upgrades requires validation through 2H26 data feedback.
• Further deterioration in industry competition could weaken the valuation and earnings-improvement path.

What to watch

• Changes in NOP+ mileage, usage duration, and user adoption following the launch of NWM 2.5.
• Whether the next-generation software release in 2H26 can integrate intelligent driving with the chassis domain and reduce latency.
• Sales performance of models including the ES9 and ES8, as well as 2Q results.
• Software subscription conversion rates after NT2 and NT3 vehicles enter the paid-service window.
• Whether in-house chips, AI compilers, and model deployment efficiency continue to improve cost-performance.