NIO’s Future: Growth Vs. Financials

Summary

  • NIO is likely to produce a large volume vehicle at a fraction of the price to appeal to the masses.
  • The EV market is projected to more than triple to $2.7 trillion allowing NIO to capitalize on this lucrative opportunity.
  • NIO is expected to increase its market share over time both in China and abroad.
  • NIO’s heavy reliance on credits as a source of income is troubling as their cars have not become profitable.

Thesis

NIO has recently become one of the major players in the alternative energy auto manufacturing industry. Following a 40% correction, NIO is wildly undervalued and gives investors a lucrative opportunity to potentially capitalize on a long-term growth stock from an equity that is strong both fundamentally and technically. In the coming years, NIO’s expanding production across multiple continents will allow it to grasp a larger market share by creating a larger capacity vehicle despite what some may see as dire financials. This consistent growth will give NIO bullish momentum for years to come allowing investors to look at NIO as a long-term position trade.

Bullish Signals

NIO’s Mass Production

As of now, NIO’s cars are not very appealing towards the majority of the consumer market. Their consumer market is very limited towards the upper class with their entry-level vehicles exceeding $50,000. However, despite these consumer prices being exceptionally high, the car’s performance can match that of Tesla and gives many investors the optimism for opportunity. It is important to note that NIO is still considered a new company. As of now, NIO’s vehicles are geared towards a smaller consumer base. This is because their production is limited which leads to a higher price. However, over time, NIO will likely have the capability to produce a vehicle at a large capacity thus lowering the price which will result in a larger consumer base.

Chart From InsideEVs

As of now, NIO’s existing sales demonstrate that this concept for NIO’s vehicles exists. It also shows that NIO can sell their vehicles, even if they are in the limited capacity consumer market with their prices averaging over $60,000. However, as time continues, NIO will likely be able to create a cheaper vehicle that will appeal to more customers globally. Over time, William Li (Founder & CEO of NIO) envisions an entry $25,000 vehicle, a car that can rival the Model 3 and become NIO’s newest potential and greatest-selling car. NIO’s current flagship vehicle is NIO’s $55,000 ES6 SUV. As many would imagine, $55,000 for an SUV is not very practical, however, NIO’s future sedan may intrigue the greater consumer base. As of now, not much is known regarding NIO’s $25,000 sedan. However, the odds are that as time goes on, NIO will create cheaper vehicles that will appeal to the masses.

NIO’s futuristic appeal towards the larger consumer base is very promising considering that NIO’s vehicles are all currently priced over $50,000. This approach will allow for NIO to grow its sales and market share, thus making NIO stock rise.

Market Forecast

The EV market is one of the fastest-growing industries in the world. The EV industry is expected to eclipse the regular gas-powered vehicle market subsequent to the year 2030. According to Canalys, this will result in roughly 33 million EVs sold, more than 10 times the 3.1 million EVs sold in 2020.

Chart From Canalys

This dramatic increase in EVs will result in a 34% compound annual growth rate (CAGR) thus increasing the industry market to $2.7 trillion by the year 2027.

Chart From Evadoption

This rapid increase in the market gives NIO a lucrative opportunity to capitalize and succeed in the future. This increase is attributed to a number of factors.

  • First, EVs are far cheaper to energize compared to gas cars. EVs are far cheaper to energize compared to the average gas car.
  • Next, tax incentives from the government allow EV owners to erase thousands of dollars that they would have owed to the government through a government-issued tax incentive rebate.
  • Also, EVs are generally built differently than gas cars. They are quieter, have faster acceleration, offer more compartment space, and have a different body/build.

Next, the EV market has grown increasingly fast abroad in both Asia and Europe. The markets from both continents are both larger than that of the United States.

Image From Transport & Environment

The EV market in the European Union is expected to reach 40 million EVs by 2030. China on the other hand is expected to reach 66 million vehicles sold by 2030. NIO’s headquarters and main manufacturing faculty are both located in China giving NIO a huge advantage to capitalize on an EV market that is 3 times larger than that of the United States. NIO will inevitably have leverage in China, giving it the opportunity to profit tremendously on such a lucrative market. These impressive numbers demonstrate that the industry is growing allowing NIO to capitalize on what has become a bigger market.

In addition, EVs have recently become part of legislation to promote cleaner energy. The state of California (America’s biggest market for the automotive industry) has mandated that every new automotive vehicle produced has to become electric by the year 2035. This is the most aggressive clean energy passed by the state legislator in decades. This government legislation suggests that NIO will have a larger market and a greater opportunity to succeed.

It is evident that NIO’s growing market gives NIO a lot of opportunities, which makes NIO a strong stock.

My Takeaway: In my opinion, NIO’s increasing market is very promising to investors, especially in their home country of China. NIO’s increasing market will increase by 34% year after year thus giving NIO a major lucrative opportunity to capitalize. This allows for NIO to tap into a 2.7 trillion dollar market by 2027 which will potentially allow for NIO to be profitable. This increasing market in China and abroad will give NIO a more broad consumer base to profit from which NIO can use to hopefully approve upon their revenues year after year. NIO is likely to profit tremendously from the growing market in a country (CHINA) that is pushing hard for EVs. As more and more people turn to cleaner energy cars, NIO will likely profit enormously from the greater consumer base.

Increasing Market Share

Unlike industry EV leaders like Tesla, NIO has actually grown its market share in the EV market both abroad and in China. As I mentioned earlier, the market in China is greater than that of the United States and NIO’s leverage in their domestic country has allowed them to better capitalize on the opportunity. As of now, NIO’s biggest competitor in the EV space is Tesla, which owns a respected 66% of the market. However, with stiffening competition coming from all sides, Tesla is projected to lose more than ½ of their market share in less than 10 years.

Chart From Evadoption

This massive loss in the market gives many other companies like NIO, a huge opportunity. In China, NIO’s popular ES6 & ES8 SUVs are competing against Tesla’s Model Y. This competition between the two companies has allowed NIO to strive on top with 23% of the SUV market in China compared to Tesla’s 17%. In a few years’ time, NIO has outsold Tesla, dropping their revenues by 27% in March selling 1184 more SUVs than Tesla in China. However, overall, Tesla has a firm grip in China with their Model 3 outselling a majority of the industry. Over multiple years, NIO has grown its market share continuously over time internationally. In December of 2019, NIO’s market share reached 2.53%, 2.8% in November of 2020, and 3.1% in 2021. This will result in roughly 100,000 vehicles sold with a factory producing 240,000 vehicles on an annual basis.

Chart From CleanTechnica

However, just like Tesla’s SUVs, this firm grip is fading at the sight of competition. The main reason as to why this is happening is the competition from domestic-based companies like NIO. In addition to NIO’s home country of China, NIO will start selling in Europe. One of NIO’s most popular vehicles, the ES8, has recently received the European Whole Vehicle Type Approval to start selling cars in Europe. This approval from Europe has allowed NIO to tap into the European markets which are already bigger than that of the United States. As of now, NIO has unveiled their cars in Europe from July in select countries like Norway and Germany. With hundreds of thousands or millions of vehicles soon to be sold, NIO’s presence in the European market gives NIO a lot of opportunity for growth and the potential to increase its market share globally.

NIO’s increase in market share gives investors a lot of hope for what is to come in the future thus leading to an increase in stock value.

My Takeaway: NIO’s increasing market share is very promising. In my opinion, NIO’s consistent rise in market share since 2019 will allow them to grab a sizable market share within the coming decade internationally despite their lacking financials. This makes me as an investor very optimistic because it can allow me to look at NIO as more than just a stock, but a long-term growth stock. Like I mentioned many times earlier, there are many other auto manufacturers who want to get a slice of the pie. However, as NIO continues to expand operations abroad in continents like Europe, it is likely that they will become a major player in shaping the EV industry for years to come. If this trend were to continue, consumers will likely view NIO as an industry leader who will rival Tesla. In other words, NIO’s increasing consistent global market share is very promising for investors.

Bearish Signals

NIO’s Financials

NIO heavily relies on regulatory credits which promote EVs in China. They do so by selling credits to other less environmentally friendly auto manufacturers in order to profit hundreds of millions if not billions of dollars. Due to NIO’s cars being zero emissions, they get to net 100% of the gross profit.

Chart From Stock Dividend Screener

NIO’s TTM’s earnings reported a net income loss of $1.272 billion from a $4.274 billion gross profit. These numbers themselves are already worrisome to an investor, however, it is important to note that a great chunk of NIO’s income comes from regulatory credits issued from the Chinese government. Instead, $432 million in issued NIO credits according to their SEC filings has propelled NIO to have less dire financial numbers. In other words, without the credits, NIO would have had worse numbers on top of their existing debt. This exposes a dark secret suggesting that NIO has not yet become profitable.

Chart From Seeking Alpha

This heavy reliance on the credits is quite worrisome considering that their biggest clients have started earning their own credits due to their upcoming electric vehicle line-up. General Motors coupled with a few other auto manufacturers have already made plans to be carbon neutral by 2040, with an all-electric line-up by the year 2035. An all-electric line-up means that these companies will no longer have to spend hundreds of millions of dollars to purchase credits from NIO. In other words, NIO will struggle to sell their credits to auto manufactures which they have relied on for years. Without the ability to sell credits, NIO finds itself in an odd situation where it may encounter more debt on top of their existing debt.

It is also important to note that NIO will have a hard time becoming profitable with or without regulatory credits.

Chart From Seeking Alpha

NIO’s gross profit is 17%, 50% worse than the consumer discretionary median of 35%. In other words, NIO will have to either increase prices at an MSRP which is already not competitive to the Model 3, or to sell more vehicles at an unprecedented rate to become profitable in the near future. In addition, NIO’s efficiency in generating income with their underlying assets is horrendous. Their asset turnover ratio is 0.62%, 40.67% worse than the industry median of 1.5%. This suggests that NIO’s assets are not a good representation of their ability to generate revenue which is troubling. These are just a few examples of NIO’s troubling financial statements.

NIO’s troubling financial statements are a bearish indicator but do not outweigh NIO’s potential growth for opportunity.

My Takeaway: NIO’s long-term financials along with their potential profitability are a little worrisome. In my opinion, NIO’s heavy reliance on credits being a source of income that has been fading is quite nerve-wracking from an investor’s point of view. NIO’s lack of profitability through the company’s biggest asset is quite troubling to me and many other investors. NIO is likely not to become profitable in the near future due to an abundance of poor financial statements which is troubling for an investor to swallow. Like I mentioned earlier, NIO profited hundreds of millions of dollars from credits in 2020 and 2021. What separates NIO’s revenue from its cars is that NIO’s credits are 100% net profit as opposed to their cars. With more and more former gas auto manufacturers turning towards alternative EVs in their fleet, it is likely that they will start earning their own credits meaning that NIO’s source of income for their credits will essentially start to fade away like mentioned earlier.

NIO Under Technical Analysis

Chart From TradingView

NIO under technical analysis from the 1 year demonstrates a potential upside. The MACD is lowered and is demonstrating a small overlap thus resulting in a forecasted increase in price. The RSI on the other hand is at 39 meaning that it is fairly valued/oversold and well within the 70 – 30 range. The candlesticks, however, show NIO moving within a channel between $64 and $30 for the last 6 months. This does not look like a pennant but can potentially allow for NIO to break out.

The 5 year demonstrates an increase in stock price. The MACD from the 5 year demonstrates a major potential overlap which is due to the MACD representing NIO’s most recent 46% correction. The MACD from this case scenario gives investors a lot of opportunities, however, it may be late for most to invest. NIO has already risen 20% from the low points. On the contrary, the RSI on the 5 year is neutral to oversold at 45 and there are little to no key levels to analyze with.

NIO’s technical analysis suggests potential upside momentum.

My Takeaway: NIO from a technical analysis perspective demonstrates a forecasted increase in price. Most if not all of the methods mentioned including RSI, key levels, pennants, and MACD including the 5 year demonstrate somewhat potential. Each indicator showed some future forecasted movement with the MACD having an overlap in site on both the 1 year and 5 year, the RSI being well within the range is somewhat oversold, and the stock moving within a channel with room to breakout. In my opinion, the technical analysis does show a lot of opportunity for growth.

Conclusion

All in all, NIO at the moment demonstrates room for growth from multiple standpoints both technical and fundamental. NIO’s expanding market alongside its increasing market and its other promising factors render out its bearish indicators. NIO is likely to outpace multiple EV competitors in the future as their growth continues to increase dramatically despite their financials. With much optimism comes some criticism as to whether or not NIO is capable of sustaining their growth. Nevertheless, NIO is a strong stock with a lot of upside momentum for years to come due to their growing industry which will allow for NIO to produce more vehicles at a fraction of the price to increase their market share resulting in a strong stock. In conclusion, NIO is bullish and is likely to gain as a long-term growth stock.

Author: Tsiumei Hsu, Seeking Alpha

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