Investors are rushing to buy anything EV-related, but are NIO shares overvalued right now or is the company still a good investment?
Chinese-owned NIO (NYSE: NIO) was one of the biggest winners on Wall Street in 2020. The electric vehicle maker’s shares gained more than 1,100% last year compared to the S&P 500’s 16%. After an almost 50% increase in the stock this past month, NIO is not slowing down. With several innovative developments planned, many analysts believe there are still more gains to come.
Growth opportunities and battery strategies
EV infrastructure in China is rapidly improving, which has encouraged even more car buyers to opt for electric models. Coupled with the Chinese government’s new laws which plan to prohibit the sale of gasoline-powered models by 2030, NIO stands to benefit as a home-grown company. Furthermore, experts predict that by as early as 2025, 16.5% of new cars sold in the country could be electric. This implies an overall 31% annual sales growth rate for the entire EV industry.
NIO’s ability to maintain its position as a market leader in the “batteries as a service” (BaaS) business model will also be crucial. If NIO succeeds, it will obtain revenue from selling its motors to clients, leasing the batteries required for those cars, and then offering customers the opportunity to swap out their old batteries for newer ones. If the company reduces swapping time down to only three minutes, this will encourage busy drivers to buy a new battery instead of waiting for one to be charged which will also eliminate range anxiety. NIO hopes to do this by eventually having battery switching stations in all major cities in China.
The company’s BaaS strategy of encouraging clients to sign-up for five-year battery leases in return for lower cost-per-year means locks customers into NIO’s ecosystem for the entire lease term.
Last week, NIO competitor Tesla began delivering its Model Y in China, cementing its position as NIO’s biggest competitor in the Asian market. Tesla’s growing popularity in this region is worrying for NIO, especially as CEO Elon Musk has slashed the prices of Tesla’s models several times in 2020 as production costs were lowered. However, it is not yet clear if the Chinese government will allow Tesla to move too far ahead of NIO, as it’s been evident that officials prefer to help home-grown companies over foreign competitors. In early January, NIO also stood up to its rival by launching its new sedan ET7.
The luxury carmaker is still far from profitable though. Over the past few quarters, NIO’s revenue has grown by triple digits, which has helped the company inch closer to breaking even. In the fourth quarter of 2020, the EV manufacturer delivered 17,353 vehicles, up 111% year-over-year (YoY). The company also set a new record in December by delivering 7,007 vehicles, representing a 121% increase YoY. As NIO gets closer to reaching a cash-flow positive state, margin expansion will be very important.
NIO also has around $3 billion in cash after it offered 68 million shares priced at $39 in December. The company said it will be using the capital for R&D and general operational purposes.
Is NIO stock a buy?
Even though some people view NIO shares as overvalued, no one can argue that it is set to make its mark on the EV industry. With revenue growing alongside a rising market in China, it’s stock should be watched carefully.
NIO is set to benefit hugely from government policies made to phase out gas-powered vehicles in the coming years in China and worldwide, alongside heightened interest from environmentally conscious consumers.
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