Chinese electric vehicle (EV) maker NIO (NYSE:NIO) has been an incredibly hot stock of late. Over the last 12 months, NIO stock has been a 14-bagger for investors. This is an EV stock with a number of catalysts that are very attractive.
Additionally, this is a stock with the potential for dominating the China’s EV market, getting ahead of peers such as Tesla (NASDAQ:TSLA). Of course, investors bullish on EV growth, particularly in the world’s second-biggest economy, have bid up shares accordingly.
This is one of the main investment theses underpinning this stock. Let’s dive into what they do, and why investors are so bullish on this stock right now.
NIO Stock Seen as Play ‘Battery as a Service’
The Shanghai-based firm’s “Battery as a Service” (BaaS) business model has enticed many investors to look closer at NIO stock. Essentially, NIO offers discounts on the up-front cost of purchasing its vehicles. A subscription for battery pack usage is required. Purchasers like the lower up-front costs, and this model appears to be a successful and profitable one.
Car buyers get a deduction of RMB 70,000 (about $11,000) off the purchase price in exchange for monthly battery subscription payments of RMB 980 (~$150). The company notes this model is inclusive of favorable government purchase incentives and tax incentives for EVs.
NIO gets upselling opportunities, offering purchasers flexible battery upgrade options. Purchasers like the assurance of battery performance that comes with such a business model. This program appears to be a win-win for the company, and has created a significant amount of brand value in China. NIO supports this program via 143 battery-swap locations in 64 cities across China.
The model makes economic sense, and is shifting the paradigm with respect to thinking about how auto makers can make these EV options more affordable for the masses. Other EV companies such as Canoo (NASDAQ:GOEV) appear to be on board with mimicking this subscription-based business model.
Enticed by Heavy Investment in Autonomous Vehicles
NIO’s announced partnership with Mobileye in late 2019 has investors bullish on the shares. The company’s plan is to have a Level 4 autonomous vehicle (so-called “high automation” as shown below) ready to bring to market in 2022. Like Tesla, NIO has promised a self-driving ride-hailing service.
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Whether regulations change quickly enough to allow such a service remains to be seen. That said, NIO appears to be making the investments needed to have a car ready for market. For investors who believe Level 4 autonomous vehicles are around the corner, NIO stock appears to be a good choice.
NIO has also recently announced a partnership with Nvidia (NASDAQ:NVDA) to use NVIDIA DRIVE Orin system-on-a-chip (SoC) in its next-generation vehicles. Understandably, this has furthered investor optimism in NIO’s capabilities to capture market share in the autonomous segment over time.
Risks Do Exist, So Trade Carefully
NIO stock is currently trading at around 48 times sales, compared to Tesla’s 24X sales figure. With valuation multiples where they are today, investors may already be worried about a mass revaluation of stocks across the board. Those with sky-high valuations like NIO’s are particularly susceptible to outsized downsized pressure in a market correction.
The fact that this stock isn’t cheap is well warranted by the growth prospects of NIO in its home market. Indeed, the Chinese EV market will be a key battleground for global car companies in the coming decades.
As demographics improve and more Chinese consumers enter the middle class, expectations are for that country’s auto growth to vastly outpace the U.S. in the coming decades. This makes competitive forces likely to drive long-term cost and margin pressures. Accordingly, large Chinese and global automakers are expected to continue to expand into China. Thus, investors need to factor these effects into their pricing models today.
Bottomline on NIO Stock
While risks do exist with NIO stock, the company’s leverage to Chinese growth catalysts is very enticing. The company’s business model and heavy investment in autonomous driving, equally so. While NIO stock represents an interesting opportunity for EV investors today, I am personally on the sidelines due to NIO’s valuation currently.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
