Nio, which we first recommended at around 3 before it took off in 2021’s bull market (and subsequently gave back the lion’s share of those gains), captures more than its fair share of media attention.
Attribute it to the stylish look of its EVs, a unique battery solution, and its strategy of selling a brand and club rather than just a vehicle.
Nio is based in Shanghai, a huge, dynamic city with a population of about 25 million which equals the combined population of America’s four largest cities: New York, Los Angeles, Chicago, Houston, plus Canada’s Toronto and Montreal. This highlights the scale of China’s consumer market of 900 million people not to mention that two of every three EVs are made in China.
The company recently reported a lackluster quarter with revenue rising 8% year over year with a $600 million net loss. Part of the problem is a price war breaking out in China, but the financial report was coupled with a more positive outlook for the balance of the year.
Nio’s stock was firm after the quarterly report and remains almost 90% below its all-time high from February 2021. Is it a buy now for forward-looking investors?
Analysts still expect Nio’s revenue to rise 59% to about $11 billion this year and based on those estimates, Nio’s stock currently trades at only one times sales. In comparison, Li Auto (LI) trades at two times this year’s sales and Tesla (TSLA), which has been lowering its prices in China as well as other markets, trades at a much higher eight times this year’s projected sales.
The near mania over anything touching electric vehicles (EVs) has long worn off, but the fundamentals of the industry never looked stronger.
While EVs make up about 7% of U.S. auto sales, the number in China is about 30% and projected by Benchmark to perhaps get to 50% by 2030. At the Benchmark conference on EV battery materials I attended this summer, it was estimated that China produces about ten times the battery cell output of the United States and the European Union combined. It also has firm control of the rare earths and critical minerals which are the basic building blocks of electric vehicles.
Taking a step back, electric vehicles are a winning proposition for China because they help solve two big problems. First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities.
Second, EVs can generate significant jobs and help the country capture the commanding heights of the EV ecosystem, a key goal of its 2025 strategic plan.
China’s EV makers also have their eye on export markets, and China’s BYD (BYDDY) already exports more vehicles than Toyota. Nio plans on expanding across Europe and it already has a solid presence in Norway. Further, it has plans to enter the Netherlands, Germany, Denmark, and Sweden this year. Besides Europe, Nio plans to set up a factory in the United States.
Finally, Nio is competitive in the EV technology game along with Tesla. Its recently launched ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge – better than Tesla’s Model 3 and Model S. Furthermore, since 2020, it has offered consumers its battery-as-a-subscription service whereby buyers can swap batteries rather than wait for recharging. Nio receives a subscription fee for these services and locks down loyalty and recurring revenue.
Even better, Nio will begin manufacturing these battery packs in-house in 2024, and this is also the target date for Nio to roll out more affordable EVs priced at around $30,000 and $45,000.
Nio initially generated a lot of media attention with its E9 electric supercar priced at $1.2 million and differentiates itself from its competitors with a network of battery swapping stations.
A key challenge for Nio stock is its negative profit margins, which are being pressured by the pricing war and the need for more scale. While it is trying to offset that pressure by cutting marketing expenses, its adjusted operating loss still almost tripled year over year in the first quarter.
Nio is clearly an undervalued EV player at these price levels, but it has issues that must be faced that go well beyond the EV price war, rising interest rates and trade tensions with China.
The electric vehicle market and supply chain is the leading sector followed by Cabot Explorer. Nio will stay on our watch list as we continue our research, and my guess is that it will soon be part of our small universe of recommended stocks when we identify a catalyst signaling better margins and profitability. Find out our top China EV pick by joining the Cabot Explorer today.