2020 saw a rapid rise and enthusiasm in electric-vehicle (EV) stocks. And Tesla is almost becoming a synonym for EVs. That’s not surprising given the publicity of the company and its CEO. Both the company’s valuation and Elon Musk’s wealth has surged tremendously over the past year. So today, we turn to a Chinese EV company, and go through NIO stock review instead.
Source: The Motley Fool / NIO and Tesla Share Price and Enterprise Value Percentage Change
Do you know that NIO is one of Chinese leading EV players. It has actually seen its shares outperformed those of Tesla over the past year.
Observe from the chart that investing in NIO’s share a year ago would have returned you more than 1000%. Comparatively, investing in Tesla’s share would have only returned you 600%, albeit still a very extraordinary return.
This can partly be attributed to the Chinese government’s push to drive the adoption of EVs in the country. This has boosted both NIO’s sales of EVs and the market sentiment for its stock.
So now the question is if there’s still more room for NIO to grow further? And if there’s still opportunity for investors thinking of jumping in now?
NIO Stock Review Performance
Let’s review quickly about NIO’s business and its recent performance first.
The company is focused on China’s premium electric vehicle market. Other than designing, jointly manufacturing and selling premium EVs, NIO is currently driving innovations in battery technologies, autonomous driving and artificial intelligence (AI). We will discuss more on this later.
For now, let’s turn our attention to its recent performance figures.
Source: NIO Inc Q4 and FY2020 Financial Results / Key Operating Results
Observe that NIO registered strong growth in the number of vehicles delivered in 2020. This is despite the coronavirus pandemic having shakened the market and demand for many businesses. Latest quarter in Q4 2020 saw a vehicle sales of RMB 6.17 billion. This represented an increase of 130% from Q4 2019, and an increase of 44.7% from Q3 2020.
Source: NIO Inc Q4 and FY2020 Financial Results / Key Financial Results
As you can see, most of the revenue comes from its Vehicle sales at the moment. On a full year basis, NIO’s vehicle sales grew more than 106%.
Shrinking Losses and Growing Gross Margin
No doubt the company is still making losses, with RMB 5.4 billion of net loss recorded for FY2020. But its loss has shrunk by more than 53% compared to the previous year. That’s a good sign.
Similarly, gross margin turned from -15.3% in 2019 to 11.5% in 2020. This signifies that the increasing scale has positive economics on its business.
The losses will remain in the near term as the company continues to expand its business and production capacity. But the reduced losses and higher gross margin are good signs that the company is on track to become profitable.
But these numbers and economics are comparable to its peers in the EVs market. So, what is making NIO standout in this increasingly competitive landscape?
NIO Stock Review: Reasons Why NIO Is Winning
Battery Swapping and Battery As A Service (BaaS)
Since the introduction of its ES8 model in 2017, NIO’s electric vehicles have been installed with proprietary battery swapping technologies. This feature allows its users to charge, swap and upgrade their batteries easily and conveniently.
In addition, the company launched its Battery-as-a-Service (BaaS) model. Basically, it allows users to purchase the vehicles and subscribe for the usage of battery packs separately. Other than lowering vehicle purchase prices, this service will allow users to upgrade its battery flexibly. At the same time, it assures its battery performance.
So this is what’s making NIO different from companies like Tesla, which is investing in its supercharging technologies instead.
At the moment, this BaaS model seems to be a good proposition to accelerate the switch from traditional fuel-driven to electric-powered vehicles.
Currently, it takes about 40 minutes for Tesla’s supercharger to charge its original 85 kWh Model S to 80% capacity.
Comparatively, NIO’s battery swap methodology takes a significantly shorter amount of time. Especially with its coming Power Swap station 2.0, which is scheduled to roll out in Q2 2021. This version 2.0 will reduce the battery swapping time to under 3 minutes.
As of the end of 2020, NIO has 172 Power Swap stations covering urban areas and expressways across 74 cities.
More recently, the company entered into a strategic partnership with Sinopec. They are committed to deploy 5000 charging and swapping stations over the next few years.
Whether the charging or the swapping technologies can emerge as the more efficient solutions among the two once economies of scale is achieved, it remains to be seen.
But, the drastic reduction in downtime to charge or swap a new battery is definitely key to accelerate the transition for customers to convert to driving electric vehicles.
NIO Stock Review: EV Refueling Market
Then again, what’s interesting is that NIO is targeting the market for EV refueling too. For instance, the company has entered into an agreement with Ford Motor. This allows Ford’s Mustang-E in China to use NIO’s battery swapping stations.
This could position NIO as the supplier of BaaS services to other EV-manufacturers. As a result, it will increase the scope of its business to that of an energy company as well.
It will be interesting to see how it will play out eventually if NIO is able to provide key services to support this huge battery refueling market. This is just like the fuel pump stations we have, spurring up at every corner of every city and expressway.
Luxury Brand and User Experience
The second thing that NIO is trying to differentiate will be its strategic focus on the luxury and premium market.
In fact, the company’s founder and CEO, William Li, commented before that he views Audi and BMW as its real competition.
So while Tesla has been trying to reduce the price for its cars, NIO has kept its prices pretty steady. This is part of its strategy to target the premium market.
Not only that, NIO is taking user experience to the next level. For example, they have stores which they call NIO Houses which function more than just showrooms and charging stations. They are designed exclusively as clubhouses and lounge areas for its customers and their friends.
So all these shows that the company is clearly focusing on the higher-end market. And if done right, it could potentially capture substantially higher profit margin for the company.
NIO Stock Review: Growth and Valuation
Now, let’s take a look at the valuation of NIO currently.
Source: NIO Inc Annual Report FY2020 / Consolidated Statements of Comprehensive Loss
In FY2020, the company recorded a revenue of RMB16.3 billion or US$2.5 billion. So how much further can it grow?
Source: Modor Intelligence / China Electric Vehicles Market Growth Forecast
To understand this, let’s take a look at the growth forecast for EVs market in China. It is estimated that the market will grow at a compounded annual growth rate (CAGR) of 31% over the next few years.
Since NIO is one of the leading players in China EVs market, we can assume that it should be able to grow at least at the industry’s growth rate of 31%.
Source: Reuters / China’s NEV sales to account for 20% of new car sales by 2025
This is in line with the Chinese government’s target. The goal is to bring the percentage of new EVs to comprise 20% of total new car sales by 2025. In absolute terms, it will bring the number of EVs sales from 1.3 million units in 2020 to about 5 to 6 million units in 2025.
Assume that NIO’s revenue will grow at a CAGR of 31% for the next 5 years. Hence, the company’s revenue will hit US$9.64 billion.
Source: Statista / Major car companies’ five-year average net profit margin as of June 30, 2020.
Next, we will assume a net profit margin of 20%, which is already reasonably high compared to the automakers today. Observe from the chart that the average net profit margin today is less than 10% generally. This assumption is to account for the fact that NIO can produce its batteries and cars more cheaply over time. At the same time, NIO is expected to move towards a service and software subscription model eventually.
So with a 20% net profit margin, this will translate to an earnings of US$1.93 billion.
Then, say 5 years later the company trades at a Price-to-Earnings (P/E) of 30. At that point in time, there will still be further growth prospects for the EVs market albeit a slower one. With that, its forecasted market capitalization will be about US$58 billion.
Source: Yahoo Finance / NIO Inc Stock Overview
This is roughly equivalent to NIO’s market cap today of US$60 billion at a share price of around US$36.
To wrap up NIO stock review, I would say that NIO’s valuation is too high to enter at the moment. Not forgetting that we are already assuming a high profit margin that the company can achieve eventually.
However, potential upside is that EVs adoption is faster in the near term. This is possible since we have already seen the company registering more than 100% growth in revenue in 2020 itself. The momentum may sustain in the coming few years.
Also, its battery swapping and autonomous driving technologies can potentially expand its scope of business in the industry. For example, as discussed earlier, it could build infrastructures to swap batteries for other EV manufacturers with its BaaS model.
Or that its autonomous driving technologies can be applied to the future robotaxi market. This will shift NIO away from just a car manufacturer, to potentially the taxis and private cars ride hailing industry.
Then again, now is too early to price any of these into the company’s valuation. Definitely possible in terms of how its business could transform eventually. But not something that we should hype up our valuation when finding value investments.
So do continue to monitor such growth companies. As things may change for the better or worse, it may present you with windows of opportunities.
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