Nio Limited Designs (NYSE: NIO) Has Been On A Sprint This Year: Will It Win The Marathon?

Kshitija Bhandaru
December 15, 2020

With Tesla Inc’s (NASDAQ: TSLA) rising valuation and impending inclusion in the S&P 500 next week, investor enthusiasm for EV or electric vehicle stocks has been on the rise. As a result, several automakers are now gunning for a piece of Tesla’s EV market share.

Chinese start-up car manufacturer NIO Limited Designs (NYSE: NIO), sometimes dubbed as “China’s Tesla” has recently been making waves in the EV industry. Its one-year stock price return of almost 1,700% is far ahead of Tesla’s 751% return over the same period.

NYSE: NIO Stock price, December 16, 2020 (Source: Simply Wall St)

Check out our latest analysis for Nio Limited

Nio went public in 2018 and is a pure-play EV company. China’s resolve to become carbon neutral by 2060, with the government pledging to increase EV market share to 20% from the current 5%, positions Nio to benefit from this phenomenon.

The fact that the company is based in the largest EV market in the world- China, meaning a large pool of potential customers, also enables Nio to offer some serious competition to Tesla’s operations in China. Analysts have been forecasting aggressive sales targets for the company, expecting the company’s revenues to grow 200% by 2022.

NYSE: NIO Earnings and Revenue Growth Forecasts, December 16, 2020 (Source: Simply Wall St)

Investors also seem to be bullish about the company’s prospects as seen by the surge in Nio’s shares this year, propelling its market valuation to around $60 billion. For context, 100-year-old General Motors (NYSE: GM) has a similar valuation while selling far more cars (7.7 million in 2019 ) compared to Nio (which sold close to 37,000 vehicles this year). In fact, even new EV start-ups such as XPeng Inc (NYSE: XPEV) and Li Auto Inc (NASDAQ: LI) who recently launched their IPOs have also seen their market capitalizations rise to similar levels to those of traditional automakers.

Given China’s push towards environmentally friendly policies, and a huge market to tap into, competition has been heating up, and several players are now wanting a bite out of that estimated 20% market share. We will briefly be looking at Nio’s top competitors in this article. But first, let’s look at some of Nio’s key business strategies

How Nio Plans To Set Itself Apart From Other EV Players

In August this year, the company launched a battery subscription model referring to it as “battery as a service” (BaaS). Under this plan, customers can purchase Nio cars without a battery, which is usually the most expensive component of an electric vehicle. This would offset the total price of the car by RMB70,000 and customers can subscribe to a 70-kWh battery pack at RMB980 per month. Essentially, what this means is that Nio is providing its customers the option to separate the purchase of its cars and batteries, making its cars more affordable to buy and therefore more attractive. Additionally, it also means that as batteries improve, drivers can upgrade easily. For Nio, this means that the company could potentially see increased sales by making its vehicles more accessible and the subscription model creates an ongoing revenue stream for the company.

The company also offers a battery swap-out service. Instead of waiting for their vehicles to charge which usually takes a long time (in Tesla’s case, overnight is recommended), drivers can swap out their empty batteries for fully charged ones in three minutes at one of Nio’s battery swap stations.

Li Auto’s Extended-Range Vehicles

Like Nio, Li Auto which went public in July this year, also seems to have its own strategy which it hopes would position it with a unique competitive advantage. Li Auto’s solution is directed towards a key hurdle the EV industry in China faces- range anxiety (fear of battery running out of charge). The company offers extended-range electric vehicles where its vehicles come with a range-extending generator enabling customers to charge their vehicles using both electricity and gasoline.

Access to EV charging stations is still quite limited in China and could prove to be a huge bottleneck if infrastructure buildout continues to lag. The flexibility that comes with LI’s vehicles gives it a competitive advantage wherein its customers would feel less anxious about buying an electric vehicle.

XPeng’s R&D Pitch

The company debuted on the stock market in August this year and has been marketing itself as an R&D focused company, concentrating its efforts mainly toward autonomous driving. For the LTM period ended September 2020, the company’s R&D expenses accounted for 53% of its LTM revenues. In comparison, Nio and Li Auto’s R&D spend was 21% and 19% of their total revenues in the same period, respectively.

The Alibaba-backed company is also working on a flying car technology as a part of its long-term strategy.

With the global autonomous vehicle market demand expected to grow at a compounded annual growth rate of 63% between 2021 and 2030, the company seems to have positioned itself in an advantageous position before we see a rapid acceleration in the smart EV market. Its R&D spend and data-driven capabilities could play to its strengths especially on urban roads in a populated country like China.

BYD’s Market Dominion

Another heavyweight in the EV space in China is the Warren Buffett-backed BYD Company Limited (SEHK: 1211). Unlike any of the companies listed above, the company also manufactures commercial vehicles such as electric buses and forklifts. In addition, the company also manufactures its own batteries. BYD differs from Nio and its peers in the sense that it also sells traditional fuel cars, but it deserves a special mention as it holds the highest market share for electric vehicles sold in China.

With the competitive landscape becoming increasingly crowded in China, BYD seems to be looking to expand internationally. The company launched its ‘Tang’ compact SUV in the Norwegian market recently and plans to expand into the wider European market as well. This would potentially make it China’s first international automobile company.

Key Risks Chinese EV Investors Should Be Aware Of

Much of the sentiment behind EV stocks in China is being driven by the government support being offered to these companies. Beijing is dishing out generous subsidies and other forms of support including license plate registrations and tax exemptions to accelerate the adoption of electric vehicles. Recently, China's Ministry of Finance (MOF) issued a budget for energy vehicle subsidies in 2021 where the total amount of subsidies will be triple the amount of subsidies in 2020 which were RMB 11.257 billion.

However, these subsidies won’t stick around forever. They are expected to phase out after 2022 and the success of these EV companies will to a great extent be determined by the pace of development in the post-subsidy phase.

Additionally, China’s EV push has attracted global players as well with key players such as Volkswagen and BMW vying for their share of the EV market pie. With more sophisticated and mature players in the picture, Nio and its local peers who haven’t turned a profit yet might feel some pressure especially in the absence of government support.

In Summary

China’s EV start-ups face potential risks that don’t seem to be properly factored into their stock prices which have risen to astronomical levels based on the euphoria surrounding this sector. Risks include expiration of subsidies and the fact that these companies are currently unprofitable and a long way-off in matching market leader Tesla’s vehicle deliveries (139,000 units in Q3 2020).

While high valuation is no reason to be bearish on a stock (ask anyone who shorted Tesla), some of the key variables Nio’s and its local peers' success would depend on include government support post-2022 and competitive advantage that lends them pricing power as new and mature competitors enter the space.

If you are after similar high growth companies that might be on a more attractive valuation than Nio, here’s a free list of companies to get you started. Alternatively, if you would rather put your money in less risky investments, this list of established and undervalued companies might be helpful.

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Simply Wall St analyst Kshitija Bhandaru and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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