How High Will Nio Stock Go?

How High Will Nio Stock Go? Nio is China’s largest pure-play electric vehicle manufacturer, and the company has seen rapid expansion in the last twelve months. The firm’s share price has increased tenfold over the last year, with investors rushing in to what they see as an attractive and growing industry.

And those investors aren’t wrong. The Chinese electric vehicle market is up there as being one of the biggest in the world, and the local government is keen to ramp up electric vehicle ownership in its bids to tackle climate change and improve air quality. 

Are Nio’s Earnings Going Up?

Nio just released its latest quarterly figures for Q1 2021, and results were pretty good overall. However, the market reacted paradoxically to the news, and its share price was trading a few percentage points lower in the days following the report.

On a positive note, the company beat on adjusted EPS by $0.95 with a non-GAAP return of -$0.04 per share. Revenue was also up 481.8% year-on-year, outperforming analysts’ expectations by $160 million with a total of $1.22 billion for the quarter. This was also up more than 20% from the last quarter of 2020.

Vehicle sales increased in Q1 by 489.8% year-on-year, as did gross profit, which was a positive $237.3 million, up from a net loss in the equivalent quarter the year before.

However, the most encouraging sign this time round was the news that Nio’s vehicle margin was now +21.2%, compared to -7.4% in Q1 2020.

Nio Revenues Solid But Management Pessimistic?

Despite evidence that Nio was turning round the company’s profitability margins and hitting some solid revenue numbers and a vastly improved EPS return, there were still some pessimistic undertones voiced by the company management.

First, vehicle production was down slightly on a month-by-month basis at 7,102 units, probably due to the semiconductor shortage that is affecting the entire electric vehicle industry.

This represented a monthly drop of 155 units, and a good 25% short of the maximum 10,000 units/month that the company believes it can hit. Even so, total deliveries for Q1 2021 of 20,060 were vastly improved from the same time last year, when the firm only managed an output of 3,838 units.

Furthermore, company guidance for Q2 2020 was fairly upbeat, given that the chip crisis shows no definite signs of abating. Deliveries are expected to increase by between 4.7%-9.7% from quarter to quarter to around roughly 21,500 vehicles, suggesting the present ~7,500 unit cap will remain, but also hinting that demand is still there and will be when max capacity is back online.

The second note of caution was sounded with respect to Nio’s current cash position. The company’s cash and cash equivalents dropped through Q1 by around 25% – which might not otherwise have been such a disaster, except for the fact that the firm is rolling out its new concept autonomous vehicle, EVE, and that it has plans in the pipeline for an expansion into a number of European and North American markets.

Both these projects will require substantial amounts of cash, and an already decreasing reserve doesn’t bode well for the future. If Nio is forced into an equity offering or needs to sell-off some of its short-term investments, the resulting dilution won’t be good for investor confidence.

The Bull Case For Nio

The bull case for Nio still easily outweighs the bear thesis on a number of important points. Its expansion into Europe, though reliant on some heavy cash investment in the near-term, represents a huge opportunity for the company. Nio has initially set its sights on a move into Norway first, as set out in its recent Global EV Strategy release. 

It should be noted here that Nio is still very much a China-centric organization: the company is headquartered in China, it sells its cars to China, and it manufactures its product in China. Therefore, any move away from its traditional stomping ground presents a huge amount of upside in revenues and profits for the firm.

So, if Nio can successfully launch in an overseas market like Norway, the ability to recreate that elsewhere will signal big things going forward. 

Additionally, the firm also has a presence in a number of other countries too: it operates a design center in Germany, an advanced technology R&D program in California, and an engineering and racing team in Britain – meaning the company won’t be starting from scratch if and when it does move into these new markets.

And Nio isn’t dragging its feet when it comes to infrastructure development, either. Its Power segment is hard at work creating an integrated mobile power solution, and its Services wing provides roadside recovery and other vehicle ownership-based benefits.

Factor in plans for the new NeoPark industry hub in Anhui province, and the potential for Nio to challenge its international competitors, such as Tesla, and national rivals like XPeng is all there.

So, What Is A Fair Price For Nio?

It’s one thing to focus on Nio’s technological capabilities as a manufacturing firm, but how does it stack up against other electric vehicle companies when it comes to valuation?

To begin with, Nio is already China’s biggest electric vehicle outfit, with a total market capitalization of around $65 billion. Contrast this with XPeng’s $22 billion, and you can see that Nio is a pretty sizeable company at present.

It doesn’t come close to Tesla’s market cap of $650 billion however, but Nio is considered a growth company so we need to figure out how much growing there still remains.

Since Nio isn’t yet profitable, it would help to take a look at its forward Price-to-sales ratio. On a one-year basis, it trades at a multiple of 11.90, which compares favorably, or at least close to, XPeng’s 10.60. However, over the two-year horizon, XPeng is projected to trade at 5.44 times sales, and Nio at 7.57.

Obviously, two years is a long time in business, but analyst sentiment implies that over that time-frame XPeng, rather than Nio, will achieve a reasonable price discovery. 

But that isn’t the entire story. Nio has a particular market edge in its Battery-as-a-Service offering, as well as its more mature and well-rounded product ecosystem, and it’s not hard to see it taking the lion’s share of revenues compared to its nearest competitors.

Given this, a higher Price-to-sales figure is justified – and given Wall Street’s propensity for being proved wrong, you can expect to see some upward estimate revisions over the next few quarters.

How High Will Nio Stock Go? Conclusion

Nio is the market leader in its local territory, and it has big plans to expand. The company is growing revenues and margins at a remarkable rate, and it won’t be long before the firm is profitable.

Its designs for infrastructure and product development mean it will retain its dominant position in China, and if all goes well, the company could one day rival Tesla on Elon Musk’s home turf.

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