I am neutral on Nio (NIO) as its strong competitive positioning, growth momentum, and opportunistic valuation after the latest pullback in the share price is offset by the enormous geopolitical risk that comes with its status as a Chinese company.
NIO is a leading Chinese electric vehicle manufacturer that designs, manufactures, and sells high-end electric vehicles and electric vehicle accessories.
The company is also a leading innovator with substantial intellectual property in the areas of autonomous vehicle technology and artificial intelligence. NIO recently began selling cars in Europe as the initial stage of its long-term global growth plan.
In this article, I will lay out three reasons to like NIO stock, along with a big risk that keeps me from being bullish on the stock.
Robust Growth Momentum
As arguably the top high-end electric vehicle manufacturer in China – the world’s largest automobile market – NIO has a massive growth runway ahead of it.
To put this in perspective, just over 6.4 million electric vehicles were estimated to have been sold worldwide in 2021, of which more than 3.2 million were sold in mainland China. By 2040, this number is expected to swell to more than 60 million worldwide, with China expected to continue leading the way.
It is also worth mentioning that NIO’s ambitions are not confined to mainland China or even East Asia. In fact, it has already begun selling its vehicles in Norway and is installing ancillary physical and digital service capabilities in the country in order to accelerate its growth in Norway.
From there, it expects to eventually sell to much of Europe and eventually possibly even North America.
Already the company is seeing impressive growth, with revenue soaring by 122.3% in 2021 and expected to increase by 74.3% in 2022. Analysts expect the company to sustain strong growth momentum over the next half-decade, with revenue expected to grow at a 39.3% CAGR over that time span.
A Leader in the World’s Largest Automobile Market
Given that NIO – as a leading domestic manufacturer in a strategic high-priority industry for the Chinese Communist Party – receives government assistance, it is well-positioned to capture its fair share of this growth.
Furthermore, NIO also has significant technical prowess. The company is investing aggressively in growing its Battery-as-a-Service (BaaS) technology via partnerships with local companies like Sinopec.
NIO is also investing aggressively in developing autonomous mobility and artificial intelligence technology and has filed approximately 50 patents thus far in these fields. If it can continue to successfully innovate in this space, it should be a major player in the era of autonomous driving.
Given its competitive positioning in the largest automobile market, NIO has good odds of obtaining a large amount of data that should help it gain an edge in the artificial intelligence race.
Opportunistic Valuation
A third reason to be bullish on NIO stock is that it currently trades at an opportunistic valuation. While it is not yet profitable even on an EBITDA basis, which makes it difficult to value, its EV/revenue ratio is quite low.
It currently stands at 2.8x compared to its historical average of 6.7x, and the stock price is under $20 per share, down from its 52-week high of $55.13.
Wall Street’s Take
Turning to Wall Street, NIO earns a Strong Buy consensus rating based on 16 Buys, two Holds, and zero Sell ratings assigned in the past three months. Additionally, the average NIO price target of $43.51 puts the upside potential at 124.2%.
Summary and Conclusions
NIO leads the Chinese electric vehicle market, with a particularly strong position in the higher-end electric vehicle market. Additionally, its technological innovation prowess and robust growth momentum in a market with an enormous growth runway give it extremely high upside potential.
Wall Street analysts are overwhelmingly bullish on the stock, and the average analyst price target implies that the stock could more than double over the next year alone.
However, investors might want to keep in mind that the company comes with considerable risk. First of all, it is not yet profitable and faces stiff competition from fellow domestic manufacturers as well as international titans like Tesla (TSLA), which has a large and growing presence in the Chinese market.
Second, it could very possibly fall out of favor with Chinese Communist Party officials if management fails to behave diplomatically with them, or it could face headwinds in its international growth ambitions if current geopolitical tensions lead to a more severe backlash against Chinese companies.
On paper, NIO looks like it might be an attractive buy here, but investors would be prudent to keep the significant risks in mind.
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