Shares of Chinese electric vehicle (EV) manufacturer NIO (NYSE:NIO) have been under serious pressure for most of 2019. Early in the year, NIO stock got a huge bump from favorable coverage in a “60 Minutes” special.
That rally was ultimately short-circuited by an announcement from management that early 2019 deliveries were trending below late-2018 levels amid a slowdown of China’s auto sector. NIO’s delivery volumes have remained depressed ever since, and Nio stock price has sputtered from above $10 earlier this year to just above $3 today.
But there’s reason to believe a turnaround may be in the cards for Nio stock.
The bull thesis on Nio stock goes something like this: NIO’s early 2019 delivery numbers have been weak, mostly because the China auto market has been weak. But if trade tensions between the U.S. and China deescalate, China’s economic conditions and consumer sentiment will improve. That will re-accelerate the growth of China’s auto market, resulting in strong delivery numbers for NIO.
Further, NIO is slated to launch a new car (the ES6) in June. If this launch happens at the same time that China’s auto market starts to pick back up, then NIO’s delivery volumes in the second half of 2019 could benefit from a double tailwind.
A huge boost in delivery volumes in the back half of the year will naturally lead to a huge rally by Nio stock. But will this bull thesis on NIO play out as planned?
Maybe. Maybe not. The bull thesis on Nio stock hinges on two things: economic conditions in China need to improve, and the ES6 has to be a huge success. Both of those things may not materialize. Thus, until investors start to see some traction on either of those fronts, Nio stock will remain weaker for a long time.
If Everything Goes Right, Nio Stock Price Can Rise Tremendously
NIO is an early-stage company in the potentially enormous China electric vehicle market. As a result, if everything goes right for this company over the next several years, Nio stock could at least double or triple.
The math isn’t hard to follow. China is home to the biggest auto market in the world. That market is growing rapidly, thanks to massive urbanization. Back in 2012, China accounted for roughly 25% of global car sales with 15 million vehicle sales. In 2017, China’s share zoomed to 35%, with nearly 25 million vehicle sales. Over time, this share will keep growing, albeit at a slower rate as the China urbanization boom slows. By 2030, China should account for roughly 40% of global auto sales, which should equate to about 32 million vehicles.
In the big China auto market, the primary growth area is EVs. From 2015 to 2018, EV unit sales in China have grown at an 80%-plus compounded annual growth rate, with EVs rising from under 1% of all vehicles sold in 2015 to over 4.5% in 2018. This year, EV unit sales in China are expected to hit 1.8 million, or roughly 7% of all vehicles sold. That trend will persist thanks to legislation in China that promotes EV adoption. By 2030, the EV penetration rate will likely be around 25%, giving the EV market a unit count of roughly 8 million cars.
NIO is currently a very small player in the China EV market. Nearly 1.2 million EVs were delivered in China last year, and only around 11,000 of NIO’s ES8 were delivered, implying market share of less than 1%. But the idea is that NIO, like Tesla (NASDAQ:TSLA) will consistently build out and ramp production of its new vehicles. driving gradual market share gains.
Assuming NIO’s market share reaches 5% by 2030, that would imply 400,000 deliveries by 2030. At an average selling price of $50,000, its total revenue would be $20 billion. Gross margins should hit 20%, thanks to its growth, and its operating-spending rate should fall to 10%. Thus, its operating profits would be around $2 billion. Taking out 25% for taxes, that implies $1.5 billion in net profits by 2030, which, based on a market-average forward multiple of 16, equates to a $24 billion market cap for Nio stock in a decade.
Nio stock currently has a market cap of roughly $3.1 billion. Consequently, if everything goes right for this company, Nio stock price could rise many times from its current levels.
Everything Probably Won’t Go Right
The problem with the aforementioned multi-bagger bull thesis on Nio stock is that it bakes in a lot of risky assumptions about the growth of NIO.
First of all China’s auto market may not continue to grow. It’s already showing signs of weakness this year against the backdrop of a slowing economy. If China’s economy continues to slow, the auto market might just stall out around 25 million vehicles per year. EV penetration rates are very likely to continue to go up. But 25% share may be aggressive. Perhaps 20% share is more realistic, implying 5 million EV unit sales in China in 2030.
Most importantly, NIO could struggle to gain market share. Right now, the ES8’s delivery volumes are already weakening after just a few months of production. Set to launch in June, the ES6 has attracted a huge number of pre-orders. But so did the ES8.
If the ES6 and NIO’s subsequent vehicles decelerate in a similar fashion as the ES8, then NIO will never hit 5% market share. That number will more likely be closer to 2%, implying 100,000 deliveries for NIO in 2030.
Using the same math as above ($50,000 average selling price, 20% gross margins, 10% opex rate, and 25% tax rate), NIO could report just $375 million of net profits by 2030. Based on a forward multiple of 16, which is average for the market, that implies a 2029 valuation target of $6 billion, which represents a return of just 4% per year.
The Bottom Line on Nio Stock
NIO stock has fallen so far, so quickly, and has broad exposure to a rapidly growing sector. Consequently, if all goes right, Nio could increase multiple times from its current levels.
But current trends imply that everything won’t go right for NIO over the next several years. Until those trends turn around, Nio stock price will remain depressed.
As of this writing, Luke Lango was long TSLA.