So far, I’ve been wrong on Nio (NYSE:NIO). To be clear, I’ve been way wrong.
After all, less than sixteen months ago, I thought there was a chance that NIO could hit zero. Even with a recent pullback, the company has a market capitalization over $24 billion.
In my defense, Nio did ride the razor’s edge. The company had to delay payroll in February. The coronavirus pandemic could have been a death knell, were it not for a $1 billion capital raise executed with the help of local government officials in China.
And even that deal wasn’t particularly attractive: Nio had to move its headquarters and give up a stake in its Chinese operations. The deal’s parameters implied Nio China’s equity was worth less than $2 per share. As recently as June, Nio was raising capital by selling stock below $6.
Still, credit should be given where it’s due. Nio did what it had to do to stay afloat and get through the pandemic. Now, with another $1.7 billion raised last month (at $17 per share), the company is on unquestionably firm financial footing. And as bearish as I’ve been on NIO in the past, the stock now looks intriguing.
That’s certainly true on a relative basis. There’s a strong case that NIO is the cheapest of the multitude of electric vehicle stocks. The question, then, becomes whether the sector as a whole is overvalued. On that front, some of my skepticism remains.
NIO Stock Versus TSLA
Trying to value any electric vehicle stock at the moment is an imperfect science. Automotive manufacturing in general is a difficult business. Sales worldwide are dependent in part on government subsidies, which can be pulled (or increased) at any time. And for Nio, intense competition makes forecasting market share difficult. There are nearly 500 EV manufacturers licensed in China.
Still, from a broad perspective, it’s almost simple to make the case that Nio is cheap, simply by looking at how peers are valued.
The most obvious comparison — even if it’s somewhat inaccurate — is Tesla (NASDAQ:TSLA). Tesla’s market capitalization is more than 15x that of Nio.
Reasonable investors can argue whether that multiple is, well, reasonable. Tesla has a more mature EV market in the U.S. and sales in Europe. It manufactures its own cars; Nio doesn’t (at least not yet). And while Nio focuses for now on high-end SUVs, Tesla has a broader reach.
That said, the Chinese market over time will be larger than that of the U.S. Higher-end SUVs should be more profitable. Nio’s recently announced BaaS (battery-as-a-service) platform is something that Tesla hasn’t yet delivered.
It’s difficult to argue forcefully that Nio should be worth one-tenth of Tesla, or one-twentieth. But on a broad basis, it does seem at the least like Nio’s value relative to the sector leader is in the range of reasonable.
The Rest of the Sector
Meanwhile, looking at the rest of the sector, the case gets much more interesting.
After all, two of Nio’s competitors now are public. XPeng (NYSE:XPEV) went public last month. Nio’s market capitalization is less than double XPeng’s $12.8 billion. But in the first half of 2020, Nio’s revenue was roughly 5x as high.
The gap relative to fellow premium SUV manufacturer Li Auto (NASDAQ:LI) isn’t as large looking at first quarter numbers or year-to-date deliveries. Nio is worth almost twice as much as Li — with about 50% more deliveries year-to-date. But Nio seems to have the early edge in the market and higher pricing with its premium models.
Smaller American counterparts further seem to support the case. Spartan Energy (NYSE:SPAQ) is merging with EV startup Fisker — and has a pro forma market cap of $3.5 billion. DiamondPeak Holdings (NASDAQ:DPHC) is bringing Lordstown Motors to market at a valuation of $4.5 billion.
Both merger targets have essentially zero revenue — yet combined are worth nearly two-thirds of Nio. So as far as smaller EV stocks go, NIO looks like it could be one of the best picks — or the best pick.
The EV Rally
Of course, there’s one big catch in using relative valuation. Being cheaper than peers doesn’t guarantee absolute upside. If those peers are overvalued, NIO will be too.
And we’ve seen EV stocks pull back across the board in recent weeks after a massive rally. Barron’s noted toward the end of August that the EV stocks it tracked at that point were up 320% in 2020.
There’s a case that the pullback has further to go. Yes, EVs are likely the future, but major manufacturers will have their say about it as well. Adoption may not be as fast, or as linear, as proponents believe.
For Nio, it’s fair to wonder if a company that doesn’t manufacture its own vehicles and still has vehicle gross margins below 10% really is worth $24 billion. That’s particularly true given competition: it won’t be as easy for Nio to move into, say, sedans, as it was for Tesla.
There are risks here. At the very least, investors need to believe that the EV revolution is coming, and coming quickly. But if they do, NIO should be at the top of their list.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
