Shares of NIO Inc. (NIO.US), one of the world’s most exciting and promising 100% electric vehicle („EV”) manufacturers, are down 70% from its all-time high, due to several reasons.
Beeing a Chinese company, and Chinese stocks are out of favour, NIO can not be an exception. However, with an audit settlement approaching, NIO’s shares should take off again, with quarterly report published on the 7th of September.
Additionally, NIO posted a record quarter in July, with strong demand for the company’s vehicles. For 3rd quarter, analysts’ (consensus) estimates are $1.41 billion in revenue and a GAAP loss of -0.20 cents, but the company could deliver a surprise of better results.
Additionally, due to favorable market dynamics, NIO should continue to outperform consensus analyst expectations as the company moves forward in the coming quarters.
Easing uncertainty, improving growth and expanding profitability should drive NIO’s share considerably higher in the coming years. But on the other hand, the strength of the dollar due to monetary and interest rate policies, coupled with market sentiment, could nullify any positive surprises.
Address exclusion concerns
Many investors get chills when they hear about a Chinese company. Many prominent Chinese stocks (including NIO) have tumbled in the past two years due to concerns about delisting and other uncertainties.
Chinese stocks are held because of their ability to rapidly expand earnings, generate profits and show substantial growth. However, due to delisting hysteria, many market participants appear to have no interest in holding these securities.
It’s not just about them being removed from the list. Other factors such as the slowdown in China, declining earnings, concerns about Chinese government intervention, geopolitical events, and other factors have contributed to the decline in popularity of these stocks.
However, the reality is that these uncertainties are transitory elements, and the big problem remains delisting concerns.
So let’s address the possibility of the delisting issue. The delisting concern applies to NIO as much as it does to any prominent Chinese stock. Baidu (BIDU), Alibaba (BABA), Pinduoduo (PDD) and many other quality Chinese companies are trading at low valuations due to delisting risk.
However, Chinese companies trade at significant discounts compared to their US counterparts and offer significant growth opportunities. Perhaps most importantly, delisting fears are probably overblown.
Washington and Beijing are close to reaching an agreement, which will give US regulators access to audits of Chinese companies listed on US stock exchanges.
Headwinds
The latest perceived headwind was the news that China had placed restrictions on Nvidia’s AI chips, even though it has nothing to do with the chips used in electric vehicles.
The fear stemmed from the alleged possibility that this could attract the kind of valuation that would impact chips used in electric vehicles.
Unsurprisingly, the market panicked over the unproven theory that this is what could possibly happen. The reality is that it will likely take much more than Chinese restrictions on Nvidia’s AI chips to trigger the kind of backlash that would cause a pushback that would have an impact on China’s electric vehicle industry and, by extension, NIO, Inc.
As for the other visible headwinds, the ongoing sporadic lockdowns are already priced in, even though there is always the temporary sale when a new one is announced. This appears to be a temporary delay in NIO’s growth, rather than any kind of long-term disruption to the company.
The remarkable potential of NIO
Another factor that is underestimated is the enormous potential of NIO which is expanding with its first plant in Europe, seeking to deliver battery swap stations and other energy products to NIO customers, accelerating expansion in countries such as Germany, Sweden, the Netherlands among others.
NIO is also partnering with Shell (RDSA.NL) to build battery swap stations globally, starting in China and Europe this year. Although NIO is gaining ground and establishing its infrastructure in Europe, the company has huge prospects in its domestic market.
China is the world’s largest electric vehicle market. Nearly 4 million passenger electric vehicles are estimated to be sold in China this year, roughly a 31% year-on-year increase. Some 21.5 million passenger vehicles were sold in China last year.
We see that electric vehicles represent almost 18% of total passenger vehicle sales, a substantial percentage that should continue to increase in the coming years.
In addition, China represents a whopping 32% of the world market for private vehicles. The remarkable growth dynamics in the world’s foremost automobile market (NIO’s home market) should provide NIO with tremendous growth opportunities for many years to come as the business progresses.
NIO achieved record sales in June (60% year-on-year growth), delivering close to 13,000 vehicles to its customers in one month.
Additionally, we see spectacular growth as the company is in its fifth year of delivering high-performance electric vehicles. If you are concerned about poor sales in April and May, it is due to the coronavirus lockdowns and should be a transient event that has passed.
More importantly, NIO followed up with another strong quarter in July, delivering over 10,000 vehicles and showing year-on-year growth of 27%. Last quarter, NIO delivered 25,059 vehicles, well above its guidance of 23,000-25,000 cars. As of July 31, 2022, NIO has delivered approximately 228,000 vehicles cumulatively.
The ET7, NIO’s luxury sedan model, recently went on sale. We see rapid growth, with the ET7 now representing a significant percentage of total vehicle sales for NIO. The ET7 is a high-quality vehicle that can offer up to 1,000 km of autonomy on a single charge.
The sedan can go from 0 to 100 in less than four seconds and has a starting price of $69,000, between 40%-50% of the price of its range competitors.
NIO vs. Other EV manufacturers
NIO’s market capitalization is around $32 billion, and consensus estimates illustrate that the company’s revenue should be around $15.5 billion in 2023.
However, NIO often surprises with higher revenues, and the company’s ET5 general-market vehicle will start selling soon. NIO has beaten revenue forecasts in 12 of the 15 quarters, and this trend of outperformance is likely to continue as the company moves forward.
Therefore, NIO could post results toward the higher end of revenue estimates, offering $18 billion or more next year.
Therefore, we see NIO shares selling at only about 1.8 to 2 times forward sales estimates. By comparison, Tesla (TSLA.US) is trading at about seven times future sales expectations and Lucid (LCID.US) has a market capitalization of around $25 billion.
However, Lucid hasn’t shown much in terms of sales, but it could generate around $2.85 billion in revenue next year. This estimate puts Lucid’s valuation at roughly nine times sales. Rivian (RIVN.US), is another early-stage EV that has yet to prove it can mass-produce, but is trading at about five times projected sales estimates thanks to massive support from Amazon.
Therefore, we see that NIO’s valuation is significantly lower than its US counterparts. Additionally, NIO’s valuation is substantially lower than that of companies that have not yet shown they can mass-produce effectively. Therefore, NIO’s price-to-sales (P/S) multiple may expand considerably as the business progresses. Once we receive clarity on the audit agreement, NIO’s P/S multiple could roughly double and should be further extended as the company grows revenue and profitability.
Source: The Financial Prophet
Despite this bullish outlook, there are several risks:
• Concerns over China’s exclusion could continue. Therefore, delisting fears and other detrimental factors related to China could continue to pressure NIO’s share price.
• The company could have various production problems and may not reach the production capacity that I envision in time. Additionally, NIO’s vehicles may experience a drop in demand, in which case the company’s share price would suffer.
• NIO remains a high-risk investment, but there is substantial reward potential if all goes well.
Article based on a story by Dario Garcia, EFA, XTB Spain
