NIO (NYSE:NIO) reached an all-time high on Monday after investors continued to flock to electric-vehicle names. Nio stock benefited from two positive catalysts: Apple (NASDAQ:AAPL) reportedly preparing to enter the EV market and Tesla (NASDAQ:TSLA) adding 7.84% to its stock price on Jan. 8.
The prospects of Tesla’s market capitalization topping $1 trillion despite not earning much of a profit justifies further gains for Nio. The Chinese company trades at a market capitalization that is less than one-eighth that of Tesla ($95 billion compared to $806 billion).
The Purchases of Nio Stock Have Re-Accelerated
Each time Nio has posted its quarterly results, its trading volume has surged in the following weeks, sending the stock higher. Those gains, in turn, have allowed the company to sell more of its shares to raise capital, diluting investors and temporarily lowering the stock price.
But investors don’t care that Nio is still reporting losses. Investors think that the company will raise and spend the correct amount of capital to support its growth. And Nio does need capital to support its business. For example, it has to spend money to build an inventory of batteries and battery-charging stations.
Nio’s Deliveries Soared
Nio posted astonishingly good December 2020, fourth quarter, and full-year 2020 deliveries. It delivered 7,007 vehicles last month, up 121% year-over-year. In Q4, its deliveries totaled 17,353 vehicles, up 111% YOY.
Last month, over 2,000 ES8s, Nio’s 6-seater vehicle, were delivered, The company also delivered nearly 2,500 of its 7-seater flagship SUVs, known as the ES6.
William Bin Li, Nio’s founder, chairman, and CEO said, “The innovative Battery as a Service (BaaS) model has shown popularity among our users since its launch. With the 100kWh battery pack offered as an option, the penetration of BaaS has reached over 40% among new orders in December, demonstrating its competitiveness and acceptance by our users.”
Investors agree. Nio is like a software-as-a-service company, except it charges subscription fees for batteries instead of software. And as the sales of Nio’s EVs grow, demand for its batteries will increase proportionately.
The Apple-Hyundai Partnership
News that Hyundai Motor, a Korean automaker, and Apple are in talks to develop an electric car sent EV stocks higher last week. Instead of looking at the potential deal as a threat to Nio’s market share, the market bid its stock higher. The talks between Apple and Hyundai may not lead to a final deal. Still, the negotiation suggests that the shift away from gas-powered vehicles to EVs is real.
But assuming the two firms form a partnership, its success is hardly assured. Apple’s culture may clash with that of Hyundai’s team. The pair have never worked together before, so it’s questionable whether they can do so effectively.
On the flip side, a deal like this may improve the quality of Hyundai’s software and the appeal of its EVs. Meanwhile, Apple would get exposure to the EV market.
Nio’s Fair Value
As shown below, Nio’s market capitalization is higher than that of many of its peers.
For Nio’s stock to reach nearly $100 per share, Nio’s revenue will need to double or triple in the next three years. I’ve used a 12% average discount rate in this 5-Year DCF Model: Gordon Growth Exit model.
|Discount Rate||12.5% – 11.5%||12.00%|
|Perpetuity Growth Rate||3.5% – 4.5%||4.00%|
|Fair Value||$90.75 – $110.30||$99.34|
|Upside||54.0% – 87.2%||68.60%|
This model uses the Perpetuity Growth formula to calculate Nio’s Terminal Value after five years.
The revenue projections I’ve used are shown below. Readers may open this model and use different top-line forecasts.
|(CNY in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||-128.80%||-21.40%||-5.00%||2.90%||10.40%||15.40%|
Nio stock can climb further if the company’s delivery growth continues to come in above its historical average.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.