Nio Stock Looks Attractive After Falling 25% Last Month

Nio stock (NYSE: NIO) is down by almost 25% over the last month, trading at levels of around $42 per share. The stock is also down by about 34% from its all-time highs. So what’s driving the correction? Firstly, there has been a broader sell-off in high-growth stocks on account of rising interest rates. Secondly, competition in the luxury electric SUV space in China is increasing, with Tesla (NASDAQ: TSLA) commencing deliveries of a locally made version of its Model Y. Separately, the global shortage of semiconductors has also hurt automotive companies and investors are likely concerned that Nio could be impacted.

That said, we think Nio stock looks like a relatively good value at the moment. Although the stock still trades at a seemingly steep 12x projected 2021 revenues, Nio is growing very fast. Sales are projected to more than double this year and to grow by almost 65% in 2022, per consensus estimates. We think the company should continue to fare well despite growing competition. The EV market in China is massive, with sales in 2020 standing at about 1.3 million units and sales are projected to grow by over 50% this year. ^[1] Nio could have an edge in China, being a homegrown brand that offers unique innovations such as battery-as-a-service.

See our analysis on Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for an overview of the financial and valuation metrics of three major Chinese EV players.

[3/2/2021] Nio Stock Updates

Chinese luxury electric vehicle maker Nio published a mixed set of Q4 2020 results on Monday. While the company’s loss per American Depositary Share was wider than expected at about -$0.14, revenues came in slightly ahead of expectations growing 46.7% sequentially to about $1.02 billion, driven by stronger deliveries of the ES8, ES6, and EC6 vehicles. Nio’s stock was down by about 5% in pre-market trading on Tuesday, likely due to the company’s lighter-than-expected guidance.

Nio expects to deliver between 20,000 and 20,500 vehicles in Q1 2021, marking an increase of about 17% at the midpoint from Q4 2020. ^[2] Considering that the company has already delivered 7,225 vehicles in January, sales over February and March are likely to be slightly weaker compared to January. Although this is possibly due to businesses remaining shut through the Lunar New year festival period that took place in early February, it should be noted that competition in the electric SUV space in China is also mounting. Tesla (NASDAQ: TSLA) recently started deliveries of a locally made version of its Model Y compact SUV. The vehicle is relatively competitively priced and could put pressure on luxury EV players such as Nio. Separately, the company has indicated that a shortage in semiconductors and batteries is likely to cut its production over Q2 2021 to 7,500 vehicles per month, down from 10,000.

See our analysis on Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for an overview of the financial and valuation metrics of 3 major Chinese EV players.

[Updated 2/8/2021] Will Tesla’s Model Y Hurt Nio and Li Auto?

Tesla (NASDAQ: TSLA) is starting deliveries of a locally made version of its Model Y compact SUV in China. Will this impact high-flying Chinese electric vehicle makers Nio (NYSE: NIO) and Li Auto – who specializes in SUVs and have gained a lot of traction in the Chinese market in recent quarters. It looks like it. There were signs of a slowdown for both EV players in their January 2021 delivery figures. Deliveries of Li Auto’s Li-One SUV declined by 12% versus December to 5,379. Nio, too, saw delivery growth in January slow to 3% compared to December, when deliveries grew by around 30%. While these trends may not entirely be tied to Tesla’s entry into the crossover market, Tesla is expected to put pressure on both companies.

Tesla has been gaining ground in China. It sold over 23,000 locally made Model 3 vehicles in China in December – that’s more vehicles than the big three EV startups Nio, Li Auto, and Xpeng put together. Now the Model Y is arguably going to be more popular compared to the Model 3, considering Chinese customer’s preference for crossovers and SUVs. Although the Model Y is unlikely to qualify for China’s national subsidy for electric vehicles, unlike the Model 3 sedan, Tesla has also priced the vehicle competitively, starting at about RMB 339,900 ($52,500). That’s below the RMB 353,600 subsidized starting price for Nio’s EC6 SUV, and slightly ahead of the RMB 328,000 subsidized price for Li Auto’s SUVs. Tesla’s stronger global brand image and software features could make its vehicles much more attractive to Chinese customers. Tesla also has the scale to take on these companies in the SUV market. Its Shanghai plant which began operations in late 2019 is likely to produce as much as half a million vehicles this year. In comparison, Nio is looking to increase production capacity to about 150,000 units.

However, Nio and Li Auto do have some advantages. Charging infrastructure remains limited in China, hence Nio is betting big on modular batteries for its EVs that can be swapped out in a matter of minutes, helping to reduce range anxiety while providing batteries as a service (BaaS) under a subscription program. Similarly, Li’s focus is on vehicles that have a small gasoline engine that can generate additional electric power for the battery, reducing reliance on EV-charging infrastructure. These companies also have the backing of the Chinese government and big tech companies and this could prove an advantage not just from the perspective of understanding the market better, but also from a regulatory standpoint. For example, Nio’s backers include Tencent and Baidu. The company has also been bailed out by the Chinese government in the past.

See our analysis on Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for an overview of the financial and valuation metrics of 3 major Chinese EV players.

[1/11/2021] Is Nio Worthy Of A $100 Billion Valuation?

Nio stock has rallied by over 15% over the last week, amid anticipation ahead of the company’s annual Nio day event that was held on Saturday. Nio’s market cap now stands at a whopping $93 billion- almost as much as General Motors and Ford combined. Does Nio warrant such a valuation? The company is certainly growing fast, with Revenue poised to double to about $5 billion in 2021 with deliveries growing fast (Nio delivered a record 7,000 cars in December). The addressable market is also growing quickly, considering that China – Nio’s home country – has set a target that 25% of car sales by 2025 must be new energy vehicles that are not purely gasoline-driven. That being said, is Nio building a competitive advantage to justify its current valuation and fend off rivals as the market gets more crowded?

Nio appears to be innovating in two key areas – namely battery technology and self-driving software, and this is a big part of the narrative driving the stock. Nio is betting big on modular batteries for its EVs that can be swapped out in a matter of minutes, helping to reduce range anxiety while providing batteries as a service (BaaS) under a subscription program. However, this is unlikely to give the company an edge, as other players can also easily replicate this. In fact, China’s EV policy encourages building in battery swapping. EVs priced above RMB300,000 (around $46,000) are granted subsidies only if they have a swapping option. Nio has also unveiled a denser battery pack with 150 kWh of capacity (up from 100kWh currently). This battery option will be available only in late 2022 – almost 2 years out – and it’s possible that other players could also have similar capacity batteries by then, working with mainstream battery cell suppliers such as CATL.

The company spent a good deal of time during its Nio Day event discussing the self-driving tech on its new sedan due in 2022 and a related monthly subscription program. The focus appeared to be more on the hardware such as high-resolution cameras, lidar sensors, and Nvidia processors – all of which are likely to be available to most other automakers. However, what really gives companies an edge in self-driving is the quality of software and the availability of vast amounts of data (miles driven) to improve algorithms. For perspective, Tesla has logged a total of 3 billion autonomous miles as of last April while Google’s Waymo logged about 20 million miles. It’s not clear how Nio will fare on these counts.

Overall, while Nio is certainly growing fast, building a brand that is becoming synonymous with luxury Chinese EVs, its valuation looks rich in our view, as we don’t see a sustainable competitive advantage yet. Nio now trades at about 18.6x consensus 2021 Revenues, which means that it is valued similarly to pricey Tesla, whose strong software and self-driving capabilities partly justify its valuation.

[12/15/2020] Why Has Nio Stock Been Trending Lower

Chinese premium Electric vehicle maker Nio has seen its stock decline by almost 20% over the last two weeks, falling to levels of around $41 per share despite posting a strong delivery number for the month of November with sales more than doubling year-over-year to 5,291 units. While part of the decline is likely due to some profit booking after an over 10x rally this year, Nio’s move to raise about $2.65 billion via a sizeable secondary share offering also hurt the stock. The offering was priced at about $39 per American depositary shares, a discount to the market price of about $42 as of Friday’s close. That said, this should be a net positive for the company in the long-run. The funding still comes at attractive valuations (Nio trades at a whopping 23x projected 2020 Revenue, ahead of Tesla) and dilution of existing shareholders is limited. Moreover, the funds should give the company a comfortable cash cushion, with the proceeds likely to be used to fund R&D for new vehicles and autonomous driving technology and to expand the company’s sales network.

[Updated 11/18/2020] Is Nio Overvalued?

Nio – the premium Chinese electric vehicle manufacturer – reported its Q3 2020 results on Tuesday, posting a smaller than expected quarterly loss, driven by record deliveries and higher margins. While Revenues rose by 22% sequentially to RMB 4.53 billion (about $667 million), gross margins expanded by about 480 basis points to 12.9% driven by lower material cost and better manufacturing efficiency. Nio continues to benefit from strong demand and incentives for EVs in China, guiding that it could deliver between 16,500 to 17,000 vehicles over Q4. This translates into a sequential growth of at least 35%. ^[3]

See our analysis Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? which compares the financial performance and valuation of the major U.S. listed Chinese electric vehicle players.

Despite the stronger than expected results and Q4 guidance, we think Nio stock looks overvalued. The stock is up by over 12x year-to-date and trades at about 27x projected 2020 Revenues. In comparison, Tesla – a more mature EV player, with solid software capabilities and growing exposure to China – trades at about 13x projected sales. While Nio’s growth rates are certainly higher than Tesla’s, it is also riskier considering the intense competition in the Chinese EV market, which has several hundreds of manufacturers.

[Updated 11/16/2020] As Nio Stock Continues To Surge, Are Investors Getting Ahead Of Themselves?

Nio – the premium Chinese EV manufacturer – has seen its stock soar a whopping 58% over the last month trading at about $45 per share, driven by strong delivery numbers for October and a conducive regulatory environment in China for EVs. After a 12x rally year to date, Nio’s market cap is now higher than General Motors. While Nio is no doubt growing quickly, with Revenue on track to double this year, the stock looks overvalued in our view for a couple of reasons. Firstly, there is a possibility that Tesla could give Nio a run for its money in its home turf, as it prepares to launch a locally made Model Y SUV, which reports indicate could be priced cheaper than Nio’s entry-level SUV ES6, which starts at $54k. In addition to a potentially lower price, Tesla’s stronger brand image and software features could make its vehicles much more attractive to customers. The company could also face challenges further scaling up production. For example, Nio recalled about 5,000 vehicles last year after reports of multiple fires. Nio is also very richly valued at about 26x projected 2020 Revenues, compared to Tesla which trades at about 12x. While Nio’s growth rates are certainly higher than Tesla’s, the risks are also higher given the intense competition in the Chinese EV space where there are over 400 manufacturers.

[11/3/2020] Strong October Deliveries Drive Chinese EV Stocks

The stock prices of major U.S. listed Chinese electric-vehicle manufacturers soared on Monday, as they reported strong deliveries for October. Nio – one of the largest EV startups in China – saw its stock soar by about 9%, as it reported that deliveries in October almost doubled year-over-year to 5,055 vehicles. Xpeng (NYSE: XPEV), another premium EV player saw its stock rise by about 7%, as it delivered about 3,040 vehicles through the month, marking an increase of about 230% from a year ago, driven primarily by sales of its P7 sedan which was launched earlier this year. However, deliveries were slightly lower month-over-month. Li Auto (NASDAQ: LI), a company that sells EVs that also have a small gasoline engine – said that it delivered 3,692 of its Li ONE SUVs in October, marking a month-over-month increase of about 5%. The company began production only late last year.

[10/30/2020] How Do Nio, Xpeng, and Li Auto Compare

The Chinese electric vehicle space is booming, with China-based manufacturers accounting for over 50% of global EV deliveries. Demand for EVs in China is likely to remain robust as the Chinese government wants about 25% of all new cars sold in the country to be electric by 2025, up from roughly 5% at present. ^[4] While Tesla is a leader in the Chinese luxury EV market driven by production at its new Shanghai facility, Nio, Xpeng (NYSE: XPEV), and Li Auto (NASDAQ: LI) – three relatively young U.S. listed Chinese electric vehicle players, have also been gaining traction. In our analysis Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? we compare the financial performance and valuation of the major U.S. listed Chinese electric vehicle players. Parts of the analysis are summarized below.

Overview Of Nio, Li Auto & Xpeng’s Business

Nio, which was founded in 2014, currently offers three premium electric SUVs, ES8, ES6, and EC6, which are priced starting at about $50k. The company is working on developing self-driving technology and also offers other unique innovations such as Battery as a Service (BaaS) – which allows customers to subscribe for car batteries, rather than paying for them upfront. While the company has scaled up production, it hasn’t come without challenges, as it recalled about 5,000 vehicles last year after reports of multiple fires.

Li Auto sells Extended-Range Electric Vehicles, which are essentially EVs that also have a small gasoline engine that can generate additional electric power for the battery. This reduces the need for EV-charging infrastructure, which is currently limited in China. The company’s hybrid strategy appears to be paying off – with its Li ONE SUV, which is priced at about $46,000 – ranking as the top-selling SUV in the new energy vehicle segment in China in September 2020. The new energy segment includes fuel cell, electric, and plug-in hybrid vehicles.

Xpeng produces and sells premium electric vehicles including the G3 SUV and the P7 four-door sedan, which are roughly positioned as rivals to Tesla’s Model Y SUV and Model 3 sedan, although they are more affordable, with the basic version of the G3 starting at about $22,000 post subsidies. The G3 SUV was among the top 3 Electric SUVs in terms of sales in China in 2019. While the company began production in late 2018, initially via a deal with an established automaker, it has started production at its own factory in the Guangdong province.

How Have The Deliveries, Revenues & Margins Trended

Nio delivered about 21k vehicles in 2019, up from about 11k vehicles in 2018. This compares to Xpeng which delivered about 13k vehicles in 2019 and Li Auto which delivered about 1k vehicles, considering that it began production only late last year. While Nio’s deliveries this year could approach about 40k units, Li Auto and Xpeng are likely to deliver around 25k vehicles with Li Auto seeing the highest growth. Over 2019, Nio’s Revenues stood at $1.1 billion, compared to about $40 million for Li Auto and $330 million for Xpeng. Nio’s Revenues are likely to grow 95% this year, while Xpeng’s Revenues are likely to grow by about 120%. All three companies remain deeply lossmaking as costs related to R&D and SG&A remain high relative to Revenues. Nio’s Net Margins stood at -195% in 2019, Li Auto’s margins stood at about -860% while Xpeng’s margins stood at -160%. However, margins are likely to improve sharply in 2020, as volumes pick up.

Valuation

Nio’s Market Cap stood at about $37 billion as of October 28, 2020, with its stock price rising by about 7x year-to-date due to surging investor interest in EV stocks. Li Auto and Xpeng, which were both listed in the U.S. around August as they looked to capitalize on surging valuations, have a market cap of about $15 billion and $14 billion, respectively. On a relative basis, Nio trades at about 15x projected 2020 Revenues, Li Auto trades at about 12x, while Xpeng trades at about 20x.

While valuations are certainly high, investors are likely betting that these companies will continue to grow in the domestic market, while eventually playing a larger role in the global EV space leveraging China’s relatively low-cost manufacturing, and the country’s ecosystem of battery and auto parts suppliers. Of the three companies, Nio might be the safer bet, considering its slightly longer track record, higher Revenues, and investments in technology such as battery swaps and self-driving. Li Auto also looks attractive considering its rapid growth – driven by the uptake of its hybrid powertrains – and relatively attractive valuation of about 12x 2020 Revenues.

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