Niu Technologies (NASDAQ:NIU), the Chinese electric scooter maker, looks like it will be a long-term winner. And although NIU stock is up 263% year-to-date as of Nov. 27, it will likely double from here. This article will show how I arrived at this estimate.
Therefore, I suspect that Niu’s $2.32 billion market cap is not at a peak. Investors might find the road bumpy, especially around earnings periods, but NIU stock is likely to make good money for investors.
On Nov. 23, the company reported very high growth rates in Q3 sales and earnings. Units sold for its e-scooters rose 67.9% year-over-year (YOY) and sales in Chinese renminbi (RMB) rose 36.7%. Moreover, the number of units sold in China rose 70% YOY.
The company is expanding very aggressively internationally. In Q4 it plans on entering the Indonesian market with its Gova Scooter, which costs about $422. Expect massive sales growth from this initiative alone.
Moreover, its scooters are getting cheaper and more affordable. The company released numbers which show this. In Q3 the total average revenue per scooter was $469.83, before accessories.
A year ago the average price in constant currency was $567.93. That means its scooters’ prices have effectively fallen $98.10, or 17.3%. Given that there is highly likely to be elasticity of demand for this product, lower prices will likely lead to higher sales volumes and growth.
How to Value Niu
One way to value the company is to forecast sales for a five-year period, put a multiple on it and discount it to the present. Then this value can be compared to the present market value to see if it is at or below fair value.
Analysts seem are estimating sales of $378 million for 2020, although this is high given the guidance the company gave. Therefore, using $350 million for 2020 and using a 36.7% growth rate for five years (the Q3 rate), sales would grow to $1.67 billion by 2026.
Next, we put a multiple on those sales. For example, today the market multiple is 6.7 times sales. That puts its future market value at $11.19 billion (i.e., 6.7 times $1.67 billion).
Lastly, we have to use a present value factor. To be conservative, let’s discount the future value by 15%. That results in a present value factor of 49.7%, i.e., about half of the future value.
Therefore, the fair value for NIU stock is $5.56 billion, or 140% higher than today. In other words, the stock is worth $75.68 per share.
However, remember this is based on a pretty aggressive annual sales growth rate for over five years. To be even more conservative, let’s assume sales compound at just 15% annually for five years. That puts it at twice today’s levels or $700 million. Using the 6.7 multiple the value would be worth $4.69 billion.
That means on a present value basis NIU stock is worth $2.33 billion. That is equal to today’s $2.32 market cap.
In other words, if sales growth is higher than 15% annually over five years, NIU stock is now too cheap.
What to Do With NIU Stock
The likelihood that Niu will grow its sales greater than 15% annually over the next five years is extremely high. We can do a short probability analysis to come up with the expected value for NIU stock.
Let’s say that there is just a 50% probability that Niu’s sales will grow 36.7% annually over the next five years to $1.67 billion. And there is a 10% probability it will grow higher at say 50% annually. That would result in $2.657 billion in sales in year five. Lastly, there is a 40% probability that sales grow at 15%, or $700 million.
As a result, the weighted average probability estimate is that sales will be $1,38 billion. That puts its future market value at $9.25 billion using a 6.7 multiple. Discounted to the present at 15% (49.7% factor), means it is worth 4.598 billion, or 98% above today’s price.
In other words, the expected value for NIU stock is that it double from its present price of $31.58 to $63.16. Let’s say it takes two years for that to occur. The expected ROI for investors is therefore 41.4% annually.
Even over three years, the ROI is 25.9%. We can conservatively say then that NIU stock should return 33% annually for several years. It looks like good value.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
