Apr 20, 2021
[5 min Read]
NIO Inc is a China-based electric car (EV) producer. The company focuses on intelligent cars that utilize connectivity technology, artificial intelligence, and autonomous driving capabilities. NIO also provides maintenance, charging stations and equipment, insurance, and similar products related to its electric vehicles.
Compare to its highest price, 62 dollars in February, shrinking to the current price of 37 dollars. It is needy to discuss whether it worth buying or not.
1.The growth of the EV market is the trend:
Almost every big automobile companies announce to transform into an EV(electric vehicle) manufacturing company since this year. Here is another headline: Following Audi, Volkswagen will stop making new combustion engines.
The best internal combustion engine never has a thermal efficiency of more than 50%, while the worst Electric vehicle engine can never be less than 90% efficient.
The transformation of traditional automobile companies to EV companies is an inevitable trend.
2.compared with its competitors:
Compared to those transformed traditional automobile companies. NIO does not need to worry about changing its supplier, training people with new skills, and developing brand new EV technologies. The transformation process of those traditional automobile companies will be painful, leaving them behind pure EV companies like Tesla and NIO for about 1-2 years. Besides, NIO has its unique battery-changing technology, which is exclusive in the world. It eliminates the charging time from an average of 1 hour to 5 minutes. With the spread of the battery swap stations, changing the battery will become increasingly convenient. Compared with Tesla, Nio is more focused on the mid - to the high-end SUV market. Nio's products are not in the same price range as Tesla's Model Y and Model X. The core competitiveness of the company is always the product; sales volumes speak for themselves.
3.Strong revenue growth:
According to its 2020 financial results, NIO had a solid financial report in 2020. Vehicle sales were RMB6,174.0 million (US$946.2 million) in the fourth quarter of 2020, representing an increase of 130.0% from the fourth quarter of 2019 and an increase of 44.7% from the third quarter of 2020.
Meanwhile, NIO delivered 7,225 vehicles, 5578 and 7,257 vehicles in January, February, and March of 2021. They all represent over 300% year-over-year growth.
Constrained by capacity and chip shortages, the monthly delivery number of NIO in 2021 will be around 7500. All this will improve with the finishing of the new factory in early 2022.
A simple logic: As batteries get cheaper and cheaper, Sales of EVs will grow exponentially. If the battery reaches 20% more affordable every year, The increase in EVs sales would be several times more than 20%
4.Chinese market and government:
Another catalyst will be the Chinese government. The Chinese government's profound reason to help develop its EV industry is to eliminate dependence on oil. As well know, oil transactions in the world are paid by US dollar. As the world's largest importer of oil, developing the new energy industry seems a feasible way out. With government support and new sustainable initiatives such as the 2060 carbon neutrality plan, the Electric vehicle market in China is an emerging and promising market. Nio finalized a crucially-timed $1 billion bailout from a local government in China in its tough time in early 2020. NIO and Sinopec recently enter a strategic partnership. NIO is allowed to install its battery swap station inside Sinopec's gas station. According to BusinessWire: "The 1.3 million EVs sold in China in 2020 represented 41% of global EV sales, just behind Europe with 42% of global EV sales. China is still far ahead of the US for EV share - in the US, EV sales represented just 2.4% of sales in 2020." The development of any industry in China cannot separate from the support of the government.
5. Top Shareholders
Based on the data from Simply Wall Street, the top 25 shareholders own 41.36 % of the company. In the top 10 shareholders, only Tencent Holding Limited and Baillie Gifford&Co slightly decrease their holding with -2.69%, -0.94%, respectively. The rest of the shareholders includes BlackRock, Inc and The Vangard Group, Inc, increase positions with varying degrees.
As a fast-growing company, it is not suitable to evaluate its value based on its P/E ratio. The company needs to sacrifice its profit to research and development and occupy as much market share. In the cellphone industry, which the top 5 companies have in total 70.9% market share in Q4 2020, the top 10 EV companies will own the most of the market share in the next five years. If NIO maintains its market position, this trillion-dollar fast-growing market will be profitable eventually. In terms of valuation, the most important thing is whether NIO can maintain its revenue growth rate rather than profit. Similarly, as the most significant competitor, Tesla has an amazingly 1123.42 P/E ratio.
The price of NIO stock shrinks from its highest 62 in February to the current 37 dollars. Its stock price has stuck around 35-40 span since March. The support is solid at the 35 dollar level, not to mention many institutions have an average price of over 40 dollars based on the data from the Fintel.
By contrast, the fundamentals of the company did not change under this setback. Contrastly, it becomes better.
On the other hand, quantitative easing by the Federal Reserve will last till the end of 2022, at least. After Biden's government releasing a two trillion stimulus plan and two trillion-dollar infrastructure plan, the financial crisis has less chance to happen. This year, the USA economy will have a strong comeback, with an anticipated averagely 6% GDP growth this year.
Compared to the fundamentals of the company. The most significant risk is politics if the Biden administration bans US companies from supplying chips for NIO. I don't expect the ban to happen anytime soon, especially since NIO has a significant amount of shareholders are American financial institutions.
Conclusion: NIO is worth holding long-term, especially since the EV market is still in its early stage. Based on the argument I mentioned above, my price target at the end of the year for NIO will be 55 US dollars. Conservatively, a 48% growth of the current price of 37 dollars.