Nio (NIO) is a pioneer and a leading manufacturer of premium smart electric vehicles, based in Shanghai, China. The company develops, manufactures, and sells premium smart electric vehicles while striving for innovations in autonomous driving, digital technologies, and electric powertrains and batteries.
What differentiates Nio from its industry peers are its continuous technological breakthroughs and innovations, such as the company’s industry-leading battery swapping technologies, Battery as a Service, or BaaS, as well as its proprietary autonomous driving technologies and Autonomous Driving as a Service, or ADaaS. (See Analysts’ Top Stocks on TipRanks).
The Rally Ahead of Earnings
Nio shares have undergone a massive rally over the past couple of years. The stock was trading as low as $1.19 in late 2019 before skyrocketing to near $67 in early 2021. The stock has consolidated its gains since, trading relatively flat year-to-date. Still, over the past month, Nio has again gained around 18% as investors have been likely getting increasingly excited over the company’s upcoming earnings report. But is the hype based on real potential going forward? Well, Chinese EV sales have been snowballing, and Nio is certainly benefiting, as seen by its explosive sales growth.
As the image below illustrates, while Nio’s monthly vehicle sales took a hit in the first half of 2020 following the COVID-19 outbreak, the company didn’t just quickly recover but returned to breaching new records by the quarter. In the first half of 2021, Nio has been ramping up production, with sales multiplying vs. the comparable months last year.
The company is often compared with Tesla (TSLA), which by the way, is a direct competitor of Nio since it offers premium, 100% electric vehicles. The company’s ET7 vehicle, for instance, will have a starting price of around $70,000, clearly targeting the high-end consumer target group.
With sales expanding rapidly, Nio’s proof of concept is clearly successful. In fact, sales would likely have been more impressive if it weren’t for the ongoing supply chain issues, which have limited worldwide deliveries of all vehicles. Still, Nio forecasts to reach a capacity of 150,000 vehicles produced during a single shift and 300,000 units on a double shift. Additionally, the company speaks of aggressive capacity expansion plans, striving to get to 600,000 units a year by the end of 2022.
Clearly, this should result in massive sales growth, which analysts expect to translate to a 67% increase year-over-year in FY2022, following estimated growth of 125% in FY2021. At the stock’s current price levels, Nio is trading with a forward P/S of around 12.2, which is not crazy for such a rapidly growing company in an exciting market space.
Still, investors need to be wary of the various risks attached to Chinese companies and future regulations, which we have seen crippling some companies from time to time. Examples include Chinese education companies that tanked earlier this year. For this reason, while the current multiple could be enticing based on Nio’s growth prospects, the discount is likely quite well-justified.
The upcoming earnings report should shed more light on Nio’s future growth prospects, likely minimizing some of the ongoing speculation. However, until we accumulate more data over time, the stock remains a rather risky bet, in my view, despite its apparent early success. For this reason, I am neutral on the stock.
Wall Street’s Take
Turning to Wall Street, NIO has a Strong Buy consensus rating, based on 9 Buys, 1 Holds, and 0 Sells assigned in the past three months. At $59.91, the average Nio price target implies 41.66% upside potential, nonetheless.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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