I suspect that Nio (NYSE:NIO)stock will tread water over the next six months or so until it can show profits.
Last month, the company raised over $1.5 billion, from U.S. investors. I wrote about that capital raise last month, noting that the company really needed that capital to survive. It was also able to raise $1 billion from local Chinese institutions.
Nio is still not even generating positive gross margins on the sale of its electric vehicles (EVs). Analysts and investors are hoping that the company can get above this minimum profitability threshold.
Granted, that will not prevent Nio from continuing to burn cash. But at least then it could work to lower its costs enough to generate positive EBITDA and net income.
Nio Follows Tesla Goes There Goes
There is simply no question that the price of Nio stock has followed that of Tesla (NASDAQ:TSLA). As the Financial Times recently pointed out, Nio and a number of other Chinese EV companies are trying to catch up to Tesla by raising capital.
But Tesla’s cars still have what the Financial Times calls “unwavering popularity” in China. The newspaper published a chart showing that the American company’s EVs far outsell those of the local Chinese automakers. Among the companies in the latter category are Nio, XPeng (NYSE:XPEV), Li Auto (NASDAQ:LI), and WM Motor.
Each of these companies except WM Motor recently raised capital in U.S. public markets in an effort to compete with Tesla.
For example, XPeng’s IPO on the NYSE raised $1.5 billion at the end of August. Li Auto had its IPO on NASDAQ at the end of July and raised $1.1 billion. WM Motor recently raised $1.47 billion in a Series D round on Sept. 21.
They all want to catch up to Tesla and some have tried to find EV market niches in China. But Tesla still dominates in China. According to the Financial Times, Tesla sold 45,721 vehicles in the first half of the year, and the Model 3 is China’s most popular electric car.
Nio’s founder, William Li, told the Financial Times that the firm’s recent cash flow problems, which seem to be behind it, were a “test of maximum pressure. “Buyers put off purchases”, according to the newspaper, as people feared the company would go out of business.
In fact, at one point, it clearly looked like that would happen. I wrote about the issue at the end of 2019 and the beginning of 2020.
What Analysts Say About Nio
Marketbeat.com says that 12 Wall Street analysts cover the stock and have an average price target of $14. This implies a loss of nearly 33% from yesterday’s closing price.
Seeking Alpha’s poll of 13 analysts shows that, on average, Nio’s revenue is forecast to be $2.21 billion in 2020 and $3.82 billion in 2021. That puts the forward price-sales multiple of NIO stock, which has a market capitalization of $25.5 billion, at 11.6 times for 2020 and 6.7 times for 2021.
These are reasonably cheap ratios on a relative basis, compared to TSLA stock. But keep in mind that Nio is nowhere near profitability.
Li, Nio’s founder, now believes that the concerns of investors and EV buyers about Nio have been “dispelled.” He told the Financial Times that “those concerns from customers have been eliminated,” and that “demand for our cars is rising rapidly.”
What To Do With NIO Stock
Barron’s recently quoted Deutsche Bank analyst Edison Yu as saying that Tesla and its competitors, including Nio, can coexist and succeed in China. The country is simply so large that plenty of EV and battery makers can survive there together.
The fact remains that EV penetration in China is still only about 2%, so it has plenty of room to grow. The Chinese EV sector is the largest new-car market in the world, according to Barron’s.
Barron’s says that the average price target on NIO stock for analysts with “buy” ratings is $17. I don’t see analysts raising their target on the stock until the company can show a path to profitability or at least indications that it’s trending towards profitability.
Nio has shown that it can survive. Now it must show that it can thrive.
On the date of publication, Mark R. Hake held a long position in Tesla.
Mark Hake runs the Total Yield Value Guide which you can review here.
