JP Morgan analysts led by Nick Lai raised their price target on Nio sharply to $40 in a report released on Wednesday.

Nio shares closed at $21.62 on Tuesday, and JP Morgan's price target means Nio has 85% upside potential.

Nio shares went up by more than 7 percent in pre-market trading on Wednesday.

JP Morgan's last rating on Nio was Neutral and was made on June 21, when the price target was $14.

In its latest report, JP Morgan gave Nio an Overweight rating and admitted that "we missed the stock's major rally YTD."

The report said Nio remains attractive from a long-term perspective.

The bank projects Nio to earn a ~7% market share in the passenger EV market by 2025 or specifically ~30% share in the premium space which Nio focuses on.

JP Morgan believes opportunities for Nio in 2021 include:

(1) Rising NEV penetration with an emerging and structural shift from "B" to "C" – with Tesla's localized Model 3 and aggressive pricing; we see an increasing (and unexpected) trend where more EV buyers are individuals, rather than corporates or individuals living in cities with purchase quotas – this structural wave could broaden EVs' addressable market, but lead to faster concentration in the EV business; Nio could benefit as long as it stays within the top 10 by market share.

(2) The extension of the NEV subsidy program toward 2022, where the battery swap business model is covered by the government's subsidy scheme, is encouraging.

(3) We project a meaningful pickup in new model launches, especially in 4Q20, along with the new model, EC6. The new sedan model is scheduled to debut on "Nio Day" in December which should further enhance the company's current product portfolio (of two SUVs- ES8 and ES6 and one crossover- EC6).

The report also pointed out downside risks for Nio which include:

Worse-than-expected execution and delivery of vehicles;

Worse-than-expected overall auto market sales/EV demand; and worse-than-expected competition from rivals with products at similar price points.