Why Nio Is a Better Buy Than Tesla

Investor bullishness for Nio (NYSE:NIO) accelerated after the company posted September and third-quarter 2020 delivery updates for investors. Nio stock fared so well that shareholders would have offset their losses from the drop in either the S&P 500 or the Nasdaq index in the last month.

nio stock
Source: Carrie Fereday / Shutterstock.com

Accelerating growth for electric vehicles in China will benefit a small handful of firms. Nio’s continued development in autonomous driving will set it apart from its competition.

Nio Stock at All-Time Highs

Nio enjoyed a stock rally that began in June. After months of worrying about its solvency, the company reported strong sales in China. The end of the lockdown in the country led to a rebound in revenue. By September, Nio posted a 133.2% year-over-year increase in vehicle deliveries. For the three months ended September, deliveries grew by an impressive 154.3%, to 12,206 vehicles.

Nio’s battery leasing offering will likely drive quarterly sales higher. The two EV models target an array of customer types. The ES6 is a 5-seater premium SUV, while the EC6 is a coupe SUV that it launched in July. And because the EC6 is available in three trims – sporty, performance, and signature – Chinese customers have plenty of choices.

The 7-seater ES8, at US $67,783, is half the price of Tesla’s (NASDAQ:TSLA) Model X. This suggests that Tesla will have trouble building market share in China, despite strong performance in the last year.

Nio Better Than Tesla

Besides its unit price superiority to Tesla, Nio’s Pilot performs better than Tesla’s auto-driving solution. Officially, Nio released the semi-autonomous technology in October. As Chinese customers compare Nio to Tesla, they will find that Nio’s assisted-driving solution is better suited for Chinese traffic conditions. CEO William Li said the company test-drove more than 300,000 kilometers (186,400 miles) across 30 major cities. With the map data collected, Nio’s self-driving EVs will fare better than Tesla’s Navigate on Autopilot. In August, it hired Ren Shaoqing, a computer vision expert and the co-founder of Momenta, a startup in the self-driving field.

Chinese customers may decide to help their domestic brand, picking Nio over Tesla. Conversely, Alibaba (NYSE:BABA) is a backer of Xpeng Motors (NYSE:XPEV). Xpeng will launch Xpilot 3.0, an assisted-driving software, in 2021. That will give customers another option to consider over Nio’s offering.


Nio will report quarterly earnings reports sometime in the month. When it does, the company has a strong track record of beating expectations:

Nio's quarterly earnings results compared to expectations

Nio’s quarterly earnings results compared to expectations

Chart courtesy of Stock Rover

Nio’s battery swapping offering is setting its subscription services apart from other firms. Instead of waiting for an EV to charge, Nio owners may swap the battery in only five minutes. This is a big time-saver for the busy Chinese customer and is a positive catalyst for increased sales in the quarterly period.

Short-term traders may sell the stock on the pop but patient investors will get a bigger reward. In a 5-year discounted cash flow growth exit model, assume the following:

Metrics Range Conclusion
Discount Rate 11.0% – 10.0% 10.50%
Perpetuity Growth Rate 3.5% – 4.5% 4.00%
Fair Value $48.78 – $66.46 $56.26

Model courtesy of finbox

Nio would need to grow revenue by around 80% annually in the next five years. If it does, the stock has a fair value of $56.26. Readers may change the assumptions to come up with a different price target.

Your Takeaway

Tesla enjoyed its strong rally throughout 2020 while Nio had a delayed start. Since Nio is still trading at a fraction of Tesla’s market share, the stock has room to grow. Higher sales in the next few years will support a valuation that is higher than where it is trading now.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/nio-stock-why-nio-is-a-better-buy-than-tesla/.

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