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Shares of China-based electric vehicle (EV) manufacturer NIO (NIO) are down 22% year to date, trailing the broader markets by a wide margin. The company went public on the NYSE at a price of $6.26 per share in September 2018. NIO stock then touched a record high of $62 in January 2021 and is currently down 88% from all-time high prices.
Currently valued at a market cap of $12.5 billion, let’s see if NIO stock is a buy or a sell right now.
The Bull Case for NIO Stock
One of the leading electric vehicle manufacturers globally, NIO has successfully gained traction in European markets such as Norway, Germany, Denmark, Sweden, and the Netherlands. It now aims to expand into other international markets and benefit from robust demand for EVs. NIO began shipping EVs in 2016 and delivered 122,486 vehicles in 2022, allowing the company to increase sales from $1.11 billion in 2019 to almost $7 billion last year.
Its vehicles are equipped with proprietary battery-swapping technologies. NIO also offers BaaS (battery-as-a-service) that allows customers to benefit from lower vehicle purchase prices and flexible battery upgrades, unlocking another revenue stream for the company.
Moreover, all NIO vehicles support battery swapping, making the recharging experience highly convenient for vehicle owners. NIO ended 2022 with 1,331 battery-swapping stations, an increase of 71% year over year. While building a network of battery swapping stations is capital intensive, it should help provide the company with an economic moat and a competitive advantage, given NIO has already completed 18 million battery swaps to date.
As battery technology evolves, NIO users can enjoy battery upgrades with higher capacities for an additional fee, driving engagement rates higher. Additionally, NIO is among the first companies to invest heavily in autonomous driving technology, and its NOP (navigate on pilot) solution can help guide vehicles on and off ramps, merge lanes, and cruise according to planned routes on highways.
China is the largest EV market in the world, accounting for 59% of total sales last year. In 2022, battery-powered vehicle sales in China were up 87% year over year, accounting for 25% of the total market, according to a report from Counterpoint Research. EV sales in China are now forecast to exceed eight million units in 2023.
The Bear Case for NIO Stock
Despite its stellar top-line growth, NIO remains unprofitable. EV manufacturers need to invest billions of dollars in capital expenditures, allowing them to benefit from higher cash flows and earnings over time.
But first, NIO and its peers must invest heavily in expanding manufacturing capacities to benefit from economies of scale. A company can raise capital either by debt or equity. Debt is ideal for companies that report consistent profits, as you must make regular interest payments. Alternatively, equity capital is used to fuel expansion plans as well and carries a lower cost comparatively, resulting in shareholder dilution.
NIO ended Q1 of 2023 with $5.5 billion in cash, providing it with enough room to support its cash burn. But the EV giant will have to spruce up its profit margins and race towards profitability in the next two years.
While China was the fastest-growing major economy in the past two decades, it is now wrestling with tepid growth, which might negatively impact long-term consumer demand for NIO. Manufacturing activity cooled off at an accelerated pace, while service-sector growth remained under pressure in May.
China can reinforce its zero-COVID-19 policy, especially if the number of cases increases in the next 12 months. This will further result in supply chain disruptions and lower production numbers for EV manufacturers, including NIO. A report from Time projects China’s weekly COVID-19 infections to surge to 65 million in June, up from 40 million in May, sounding the alarm bells.
Further, competition from market leaders such as Tesla (TSLA) and legacy manufacturers, including Ford (F) and Volkswagen (VWAGY), will also impact NIO’s ability to expand in major EV markets.
Is NIO Stock a Buy or a Sell?
NIO trades at a compelling valuation compared to Tesla and other pure-play EV makers. Wall Street expects NIO’s adjusted loss per share to narrow from $1.39 in 2023 to $0.42 in 2024. I believe NIO is an attractive contrarian bet due to its cheap multiples, an expanding addressable market, improving profit margins, multiple revenue streams, and a widening portfolio of vehicles.
Competition remains a concern, but the EV market could be worth trillions of dollars by 2030, providing enough room for multiple players to thrive. Investors are also worried about the economic slowdown in China, but NIO is now targeting other global markets, which should support top-line growth for years.
Tesla stock is currently priced at 8x trailing 12-month sales. While NIO is much smaller compared to Tesla and is unprofitable, it is among the most undervalued EV stocks globally. If NIO is valued at just 3x trailing 12-month sales, it is trading at a discount of 55% right now.
As seen in the above table, Wall Street analysts remain bullish on NIO stock and with a Mean Target of $17.29, which is more than 125% higher than where the stock is currently trading. In addition, in April Citigroup analyst Jeff Chung maintained a buy rating on NIO with a price target of $23.30, indicating an upside potential of over 150%.
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