Back in the summer when NIO (NYSE:NIO) floated details on its IPO, investors treated the Chinese electric-vehicle firm as a true Tesla (NASDAQ:TSLA) rival. And even though NIO stock is nowhere near its opening-day high of $13.80, the company still has a market cap of $7.66 billion.
Shareholders are confident the premium electric vehicle company will compete favorably against established, premium brands. But are they giving NIO too much credit?
NIO’s SUV EV
NIO has an all-electric ES8 SUV that is comparable to the Model X 75D offered by Tesla. Audi has the Q7 45 e-Tron, while Mercedes-Benz has the AMG GLS 63. NIO’s ES6 started accepting pre-orders on December 1. Its specifications are impressive.
If you look at the details on the NIO website, the model has characteristics that may easily take market share from its rivals. For instance, the ES6 can accelerate from 0-100 km/hr in under 5 seconds. The body is made with all-aluminum. Inside, the EV is powered by a dual-motor electric all-wheel drive.
NIO’s Strong Third Quarter Results
China’s move to ease tariffs on U.S. vehicles may raise the competitiveness of the electric vehicle marketplace. And NIO already has strong momentum from production and sales in the third quarter. NIO reported that it produced 4,206 ES8 vehicles and made 3,268 deliveries. In Q4, NIO expects revenue in the range of $418.5 million-$436 million. Also in the third quarter, the company had 12 NIO Houses and 9 pop-up NIO Houses across 19 major cities in China.
NIO’s brand is resonating well with its current and potential customers, signaling revenue strength ahead. The NIO app had over 626,000 active users in total. And on its conference call, management said it delivered 5,300 vehicles and will deliver ~2,500 units in each of the next two months. So after November and December, that is a total of 10,000 units. Each day, NIO is taking in 50-80 orders, each of which requires a USD $6,500 (RMB 45,000) deposit.
Expect Losses Ahead, Pressuring NIO Stock
Just as Tesla started with losses in the early stages of its business cycle, NIO will report losses, too. At this juncture, NIO’s first priority is meeting demand. Operating costs will outpace revenue as the manufacturing facility and sales channels expand. But once sales reach a critical level, NIO will report positive free cash flow and eventually profits, too.
Despite negative profits, executive Louis Hsieh said that gross margin will improve. Vehicle margin will get better if NIO hits its delivery target of 7,000 in Q4.
But eventually, NIO will benefit from falling operating costs and battery costs. Due to the vehicle registration system in China having a waiting list, getting license plates for new NIO vehicles also slows output.
As mentioned previously, once the company scales and production increase, large volume orders will give NIO better purchasing power. It may complete volume orders on batteries and demand a bigger discount.
The Bottom Line on NIO Stock
According to SimplyWall.St, NIO stock is worth $19.59, based on its future cash flows. The assumption is that NIO will grow earnings by 51.2% annually. This is almost twice that of the growth rate of the automotive market. Revenue is also predicted to grow by 59.5% annually, again outpacing the auto market’s growth of 10.9% by six-fold.
As usual, any copy that just IPO’d will not have a long history of financial data available. NIO does not make a profit yet and revenue may not outpace expenses for some time. If investors understand that risk but believe the demand for its all-electric EVs will be oversubscribed quarter-after-quarter, expect the stock to trade like Tesla stock. That is, it will move sharply higher.
Disclosure: The author does not own any of the stocks mentioned.