Nio Stock Hasn’t Shaken Its China Discount Yet, But It’s a Long-Term Buy

Nio (NYSE:NIO) stock should be having a better month than it is, even if only as the result of the larger market. 

A close-up shot of the Nio (NIO) ES8 vehicle.
Source: xiaorui / Shutterstock.com

Tesla (NASDAQ:TSLA) reported a record profit of $1.6 billion on Oct. 21. Unfortunately, the good news shared by the electric vehicle maker failed to carry over to China’s EV players. NIO stock barely budged on the news.

Despite Nio continuing to grow its business methodically, investors appear to have little appetite for its stock at the moment. However, I believe that long-term investors will do very well buying NIO stock under $40. 

Tesla earned $1.6 billion in Q3 2021 on $13.76 billion in sales. It sold 241,391 cars during the third quarter, almost double the amount Nio has cumulatively sold for the ES8, ES6, and EC6 over its brief history.

There’s no question that Tesla is an investor favorite, but when you deliver the goods, that’s to be expected. Tesla said in its quarterly report that it expects to see a 50% increase in annual sales for the foreseeable future. No wonder TSLA stock is testing its all-time high of $903.32.

I’ve been a fan of Elon Musk and Tesla for a long time. While I’m not nearly as familiar with Nio CEO and founder William Li, I do believe he’s done an excellent job guiding the company through its growth spurts.

Whether it be the financing issues it faced in 2020 or the current chip shortages in 2021, he and his management team have confronted them head-on and persevered. 

 At the beginning of October, Nio reported it delivered 24,439 vehicles in the third quarter, 100.2% higher than a year earlier.

A highlight of the quarter was the company’s first deliveries to customers in Norway, its latest growth area. Moving beyond China is an essential part of its development.

Over the trailing 12 months (TTM), Tesla delivered slightly more than 800,000 vehicles, up from just over 700,000 in Q2 2021, a growth rate of approximately 15%. 

Nio’s TTM Deliveries Q3 2021 vs. Q3 2020

Quarter Deliveries Quarter  Deliveries
Q3 2021 24,439 Q3 2020 12,206
Q2 2021 21,896 Q2 2020 10,331
Q1 2021 20,060 Q1 2020 3,838
Q4 2020 17,353 Q4 2019 8,224
TTM 83,748 TTM 34,599

Over the same period, Nio increased its TTM deliveries by 142.1%, about 10x the increase for Tesla. 

Now, I realize that Tesla was starting from a much bigger base, so I’ve gone back to 2017 when it finished the year with 80,060 deliveries, approximately the same amount as Nio’s TTM deliveries. In 2018, Tesla delivered 245,240 vehicles, 206.3% higher than a year earlier. 

So, if Nio wants to match Tesla’s relative growth, it will have to increase its deliveries by more than 100% over the next four quarters. It’s doable, but with the chip shortage, it’ll be challenging to get to 245,000 by Q3 2022. 

I guess we’ll see.

Is There Anything to the China Discount?

As I write this, Tesla is trading up almost $17, at 24.3x sales. Meanwhile, Nio is trading just below $40 at 14.6x sales. You would think that Nio, being at approximately the same stage as Tesla was in early 2019, would get a higher multiple for its sales. 

In 2018, Tesla had $21.46 billion in revenues or sales per share of $125.85 [$21.46 billion divided by 170.5 million shares outstanding). It finished the calendar year at $66.77. 

However, Tesla split five-for-one in August 2020. That changes its sales per share in 2018 to $25.17 [$125.85 divided by five) and 2.7x sales. 

So, no, I don’t believe there’s anything to a China discount. Instead, it has more to do with Nio’s TTM operating loss through Q2 2021 was almost $3 billion, while Tesla’s TTM operating profit of $4.5 billion was 250% higher. 

At present, there is no comparison financially between the two companies. Tesla is a blue-chip and Nio is a wannabe. 

The Bottom Line

The last time I wrote about Nio in mid-September, I said that NIO stock was a good buy under $40. Nothing’s changed about that sentiment. 

I remarked in that article that earlier in September, Nio had lowered its expectation for Q3 2021 deliveries by 1,000 to 23,000. But, of course, it didn’t have to do that, coming in 439 vehicles above the company’s original guidance of 24,000 for the quarter.

While Nio has some work to do before it gains a Tesla-like valuation, I don’t see anything that screams stay away. 

Nio remains a long-term buy.

On the date of publication, Will Ashworth 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.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. 


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