Is NIO on a solid footing to harness China’s electric breakthrough?

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Speaking of electric vehicles (EVs), the first name that comes to mind is You’re here TSLA. This EV pioneer transformed the electric mobility space in the same way that Amazon AMZN has changed the retail landscape and Netflix NFLX has revolutionized the entertainment industry.

While Tesla still remains the world leader in electric cars, a number of automakers are following suit by rapidly shifting gears to electric vehicles. Thus, the competition in the EV space is intensifying with each passing day. Building on the green revolution and building on the success of Tesla, a Chinese EV maker NIO Inc. NIO is rapidly emerging as a rising star in EV space.

The Chinese EV market is on a roll, with domestic manufacturers accounting for over 50% of global EV deliveries. Thanks to favorable government policies, the extension of subsidies for electric cars, and a strong supply chain network for electric vehicles, industry watchers are extremely optimistic about the country’s transition to the future. green. . – The country, which is already the largest market for electric mobility, expects demand for green vehicles to rise to 25% of new car sales by 2025. NIO appears to be well positioned to ensure a strong foothold in long term in the rapidly evolving electric vehicle industry.

Often touted as the Chinese Tesla, NIO shares have been in tears for some time now. On a cumulative basis since the start of the year, the stock has soared 1,093.6%.

Why do we like the stock?

Rising shipments boost revenue: NIO currently offers three high-end electric SUVs, namely ES8, ES6 and EC6. The company delivered 36,721 vehicles in the first 11 months of 2020, up 111.1% year-over-year. In the last reported quarter, NIO reported revenue of $ 666.6 million, up 146.4% year-over-year. The top line also broke the consensus mark of $ 628 million on strong deliveries. As the company focuses on increasing production, its vehicle margins are gradually improving. The vehicles margin was 14.5% in the last reported quarter, down from 6.8% lower last year. The company rebounded to gross profit of $ 83.6 million from the prior year’s gross loss of $ 221.6 million.

Optimistic outlook: NIO expects deliveries in the fourth quarter of the order of 16,500 to 17,000 vehicles, indicating an increase of almost 10% at the midpoint of guided range. Revenue is projected to be between $ 921.8 million and $ 947.9 million, which indicates an increase of 103% over the reported figure in the corresponding quarter of 2019. Gross margin is also expected to increase due to huge sales and healthy vehicle margins. Zacks’ consensus estimate for 2020 and 2021 sales suggests an increase of 110.7% and 93.9%, respectively, from figures released a year ago.

The BAAS strategy is a game-changer: NIO’s battery swap technology offers the company an advantage over its peers. Management says a battery pack can be replaced in vehicles in about three minutes. The technology, which is part of NIO’s Battery-as-a-Service (BAAS) strategy, saves time when charging an EV and alleviates range anxieties. In October, it was announced that NIO Power had completed over a million battery swaps, becoming one of NIO’s most beloved power services.

Government backs lifeline: The company’s strong position with the Chinese government offers it a huge advantage. In early 2020, NIO suffered a cash flow crisis and was close to filing for bankruptcy amid the COVID-19 outbreak in China. However, the company has come a long way since then. After raising around $ 1 billion in new funding from China’s economic development authorities in April, insolvency risks are no longer relevant. NIO has succeeded in consolidating its cash flow through private placements and injections of funds by strategic investors. Chinese internet giant Tencent Holdings has invested in the EV maker in recent years. In June, it increased its stake in NIO to 15.1%. The financing agreements have indeed breathed new life into the stock.

Can NIO offer Tesla tough competition in its territory?

The electric mobility revolution in China is a major catalyst for NIO, which spares no effort to increase production and conquer the booming market for electric vehicles. However, NIO is a relatively newer and smaller brand compared to the burning electric vehicle maker Tesla. Additionally, Teslac claims the lion’s share of China’s booming electric vehicle market, thanks to the great popularity of its Model 3 SUVs and strong production prospects at Shanghai Gigafactory. Recently, the company also obtained official authorization to start selling its Model Y made in Shanghai, China. Tesla has actively capitalized on the demand for electric cars in China, which has been the fastest growing international market in China. the company. In fact, 40% of the company’s sales could be concentrated in China by 2022. Although Tesla enjoys the first-mover advantage and is a much larger and established brand, we don’t think NIO can. pose a serious challenge for Tesla.

Final words

It should be noted that NIO’s weak balance sheet and increased operating expenses pose challenges. However, the business is still in the development stage and most EV manufacturers are. Indeed, the EV hype is zealously valued in stocks, pushing valuation to staggering levels. But NIO surely has a lot of factors working in its favor that make it a good choice in the long run and position it well to take advantage of China’s electric vehicle boom. It’s just that one could wait for a better entry point to grab the action. NIO currently wears a Zacks # 3 (Hold) rank. You can see The full list of current Zacks # 1 Rank (Strong Buy) stocks here.

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