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Nio Stock: The Anatomy of a ‘Tesla Killer’

If there’s one thing tech investors love, it’s a good old-fashioned fistfight. Right now, the most gnarly fight in the market is in the Electric Vehicle (EV) space. No sooner has the market celebrated the incredible success of Tesla (NASDAQ:TSLA) than it has started clamoring for the champ to go down. In the underdog corner, we’ve got Nio (NYSE:NIO) stock, which is a notable threat in the fight for EV dominance in China.

Image showing a Nio store with a glowing logo on the front.

Source: Andy Feng/Shutterstock.com

Nio comes in at a market capitalization of $82 billion. It delivered triple-digit delivery growth last quarter. Oh, and many have given it the nickname “Tesla Killer.”

If you haven’t been tuned into the fight, here’s the skinny. It goes like this: 

  1. Tesla’s demand momentum in China is slowing as EVs from domestic brands (mostly Nio) gain ground. 
  2. Competition will force Tesla to cut prices, pressuring gross margins. 
  3. Game over for Tesla (Tesla is cancelled). 

I love a good underdog story, but let’s get serious for a minute. From an investment perspective, Tesla is far from dead. In fact, if we look at stock performance, we can see it has really been a draw between the two stocks. Nio stock is up 15% over the past 30 days, essentially in line with TSLA, which is up 9% in the same period. 

Here’s my quick take. I’m still a buyer of TSLA stock at these levels. But I’m also a buyer of Nio stock. That’s true even though I think the whole Tesla killer narrative is pure nonsense. Why? 

Because, if there’s another thing investors love besides a brutal fight, it’s an easy long/short trade. Right now, momentum and a reasonable valuation, are working in Nio’s favor. So, buy TSLA. And buy Nio stock (for now, anyway … until it gets too rich).

Confused? There are three key differentiators, which, in the short term, give Nio an edge on its home turf.

Here’s a closer look.

Nio Stock: Home Field Advantage 

With a population of nearly 1.4 billion, the People’s Republic of China is the largest auto market. Last year, government regulations and subsidies promoting so-called New Energy Vehicles (NEVs) helped China garner nearly 50% of EV sales worldwide.

While Tesla remains the world-leader in electric vehicles, the company faces pressure in China, as home-grown automakers gain traction. Enter Nio, which is, without a doubt, Tesla’s biggest competitor on its home turf.

At a market capitalization of $82 billion, Nio is valued just under General Motors (NYSE:GM) — quite an amazing feat for a company which nearly went bankrupt only two years ago. The Chinese automaker returned to triple-digit delivery growth last month, helped by strong growth in NIO’s flagship model ES6. Now, Nio looks to expand its reach in the EV market with the recent debut of its first luxury sedan, the ET7, which competes with Tesla’s Model S. 

Much like Tesla, Nio is a digital, premium luxury car manufacturer, with particular appeal to middle class users in China looking for alternatives to Audi’s A6 and Daimler’s (OTCMKTS:DMLRY) Mercedes E class. But, even though these two are fighting for the same turf, that’s largely where the similarities end.

Investors looking to see if Nio can knock out Tesla can start by assessing these three strategic differences between them.  

Strategy No. 1: Outsourced Manufacturing  

Nio has outsourced its entire manufacturing operation to Chinese-backed contract manufacturer JAC Motors, adopting an asset-light strategy popularized by other technology giants like Apple (NASDAQ:AAPL) with the iPhone. Nio’s approach reduces the company’s capital requirements while minimizing liquidity risk, which we know nearly crushed the company once already. It also optimizes JAC’s utilization and asset ROI, which is good for the Chinese government. 

Nio’s strategy is in stark contrast to Tesla, which from the start adopted a vertically integrated and CAPEX-intensive manufacturing approach by building and operating its own Gigafactories. While the EV giant paid a steep cost to get to volume production, it gained far more granular control over its supply chain and finished products, economies of scale and increased control over pricing.

Short-term pain, long-term gain.  

Strategy No. 2: Battery-as-a-Service 

Second, Nio has a unique solution to the “range anxiety” problem, or the need for battery recharge: a battery-as-a-service (BaaS) subscription service. Simply put, customers buy the car and rent the batteries for a monthly fee (approximately 20% of the vehicle price). The benefit: upfront cost savings. This cuts the vehicle sticker price by as much as 70,000 yuan ($10,100) on all Nio models. Nio owners can subscribe to a 70 kilowatt-hours battery for approximately 980 yuan ($142) per month.

Strategy No. 3: Battery Swapping 

Third, whereas Tesla (and other EV) owners are accustomed to parking in a charging station and waiting (potentially hours) for a re-charge, Nio’s solution is to simply swap the battery. Swapping allows customers to easily replace the vehicle’s battery once it goes dead or requires an upgrade. Customers can simply drive into a swapping station, and in a few minutes, their depleted battery can be removed and replaced with a fully charged one. Nio claims to have completed over 2 million swaps

Notably, Tesla attempted both BaaS and swapping but ended the service in 2015 (only 2 years after its launch). Tesla CEO Elon Musk claimed that a lack of interest was the culprit for the service’s end. The company chose instead to develop longer-lasting batteries for its EVs. Tesla’s take: plugged into the company’s proprietary superchargers, a Model S battery can be charged to 80% capacity in just 28 minutes, free of charge. On the other hand, a Nio battery swap is by appointment only and could cost the driver between $60 and $80.  

The Ties That Bind 

Looking more closely, it’s clear that the single common thread that ties together Nio’s three differentiators is the Chinese government. Simply put, Nio’s BaaS subscription and swapping model allows customers to take advantage of government incentives such as a purchase tax exemption and government subsidies for EVs. These make Nio cars more price competitive and affordable than competitors, including Tesla. 

In April 2020, China issued a new energy subsidy policy for EVs, which has been widely interpreted as the Chinese government’s implicit promotion of battery swapping vehicles. For battery charging EVs, only those priced 300,000 yuan ($45,827) are eligible for the subsidy. In contrast, battery-swapping EVs benefit from the subsidy regardless of price. It’s easy to see how this policy represents the Chinese government’s nod to Nio over Tesla. 

The Bottom Line on NIO Stock 

To be clear, the Chinese (and global) EV market is still in its infancy. There’s plenty of room for more players to gain share, particularly those with high range, charging performance and good value-for-money. 

Retail investors are desperate to see a “two horse race.” And while Nio certainly has some important home-turf advantages, time will tell whether the company can provide the trifecta of a strong EV sales curve, a crystallized portfolio value and geographic and segmental exposure.

With the global chip shortage largely behind the company, Nio stock appears well-positioned to ramp 2H production. With the stock trading at 15x forward price-to-sales, versus Tesla at 13x and Churchill Capital Corp IV (NYSE:CCIV) at “infinity” (sales are zero), I’m a buyer of Nio at these levels.

I’d pair a long NIO and/or long TSLA position with a sell/short position in CCIV stock

Reader Q&A: More Fun With Lucid Motors’ IPO Valuation  

In a response to the article, RSVP ‘No’ to the Lucid Motors Party Before CCIV Stock Crashes a reader wrote the following: “One thing I was looking for was a comparison of Tesla’s historic sales to market cap to see how Lucid stacks up to where Tesla was at the same point in its start up.” 

Here’s my answer.

That’s an excellent question! As I’ve mentioned, this is a smart exercise in theory — but impossible to carry out in practice, since 1) Lucid hasn’t reported any revenues (or anything else) yet and 2) Lucid hasn’t provided any financial forecasts other than what’s included in the original S-4 filing from Churchill Capital Corp IV. That said, let’s take a stab at it. 

Tesla’s June 10 IPO (initial public offering) was for 13.3 million shares of common stock at $17 per share. That’s a market capitalization of only $226 million! Based on Tesla’s reported 2011 revenues of $204 million, at the time, the market valued Tesla at approximately 1.1x forward sales. 

Now, let’s compare Tesla’s IPO valuation with that of Lucid Motors. Looking through the S-4, CCIV says Lucid could generate sales of $22.8 billion in 2026. Based on an established precedent of over-promising and under-delivering SPAC IPOs, these numbers look shady at best. They’re also 5 years away, so … here’s a more tangible back-of-the-envelope estimate. Based on Lucid’s implied valuation of $42 billion ($26.38 x 1.6 million shares outstanding) and a 2022 sales estimate of $2 billion these numbers imply a multiple of 21x forward sales. Also note that $2 billion in sales is giving a lot of credit for a car manufacturer in its first year of volume production!

The bottom line: there isn’t any historical precedent for a pre-revenue company coming to market at this kind of valuation. My view hasn’t changed. As a public company, I expect management to re-set the bar substantially below my back-of-the-envelope forecast.  

Your comments and feedback are always welcome. Let’s continue the discussion. Email me at jmakris@investorplace.com.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.

Article printed from InvestorPlace Media, https://investorplace.com/2021/07/nio-stock-the-anatomy-of-a-tesla-killer/.

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