I am neutral on NIO Inc. (NIO), as its rich valuation offsets its massive growth potential.
NIO is a pioneer in China’s smart and high-tech luxury EV market. The company is a major innovator in next-generation technologies, including autonomous driving and artificial intelligence, which it offers at a lower price point than its direct competitors like Tesla (NASDAQ:TSLA).
In addition, the Chinese government has a vested interest in NIO’s growth, and strives to make it a leader in the EV marketplace. (See NIO stock charts on TipRanks)
Strengths
As a young and fast-growing company, NIO's sales more than doubled in 2020. The company prides itself on its continuous innovations, including its premier battery swapping technologies, Battery as a Service (BaaS), and Autonomous Driving as a Service (ADaaS).
It is worth noting that NIO came to the brink of bankruptcy last year while fighting the COVID-19 pandemic.
However, NIO has enjoyed strong support from the Chinese government, and was able to secure $1 billion in financing, which is expected to remain an important source of funding for the company in financially challenging times.
Recent Results
NIO achieved a record-high delivery of 21,896 vehicles in the second quarter of 2021, as well as 7,931 vehicles in July, bringing its total vehicle deliveries to 125,528 as of July 31, 2021.
The company’s revenue grew to $1.3 billion, up by 127% year-over-year, and 5.8% sequentially.
Amid stiff competition, NIO has significantly ramped up its production over the past year and is speeding up the launch of three new vehicles in 2022, including the ET7, a flagship high-end smart electric sedan.
In Q2 2021, vehicle margin reached 20.3% (compared with 9.7% in the second quarter of 2020), while gross margin reached 18.6% (compared with 8.4% in the second quarter of 2020).
Shares of NIO have outperformed the broader market over the past year, as the company overcame its debt and liquidity fears. Going forward, the company will face a number of challenges, including the global shortage of semiconductor chips, as well as potential tech regulations in China.
Valuation Metrics
NIO stock is quite expensive, based on its current forward-looking multiples. The price-to-cash flow ratio is quite rich at 161.9x, and the stock is still running up severely negative EBITDA, free cash flow, and normalized earnings. That said, the forward enterprise value to revenues is actually quite reasonable at 8x.
Revenue is expected to grow at a rapid rate for the foreseeable future, as it is projected to see 123.6% year-over-year growth in 2021, and 66.6% growth in 2022.
With NIO's international growth just beginning to take off, and the company currently investing in aggressively growing its Battery as a Service business, revenue could have additional tailwinds in the near future.
Wall Street’s Take
From Wall Street analysts, NIO earns a Strong Buy analyst consensus, based on six unanimous Buy ratings. The average NIO price target of $67.52 puts the upside potential at 79.3%.
Summary and Conclusions
NIO is an emerging leader in EV and BaaS technology. Thanks to its very robust home market and international growth potential, the company could see massive growth in the foreseeable future.
That said, the stock is still a ways off from profitability, and trades at a pretty hefty valuation at the moment. As a result, it might be prudent to wait for a sell-off before purchasing shares.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
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