Electric car manufacturer NIO made shockwaves in the electric vehicle (EV) industry after the release of its new luxury sedan, the ET7. The announcement sent its stock price up by 14%. The company’s latest car takes to the market at 69,000 USD and exceeds the charge mileage (the distance the car can travel on one charge) of its competitors, running on 620 miles. Additionally, NIO’s joint venture with American tech giant Nvidia has improved the onboard technology, offering an autonomous driving feature. These features seem set to disrupt the existing industry monopolised by brands such as Tesla and Kandi.
NIO may look to take advantage of the current state of EV industry in emerging and developed markets. The manufacturer has presented plans to enter Europe by the second half of 2021. This poses a threat to manufacturers such as Porsche and BMW who have recently ventured into the EV industry. NIO’s biggest competitor, Tesla, has also been affected by the surge in NIO’s stock price. Tesla’s stock as well as a few other EV stocks, including BMW and Chevrolet, reduced upon the announcement. Particularly in emerging markets, Tesla’s decision to reject a Chinese government stake in its business may be a catalyst for future tensions. This may present a further opportunity for Chinese-backed NIO to capitalise on, through competitive pricing based on cheaper manufacturing and transportation costs. China is leading a switch to electric vehicles (EV) in emerging markets which will save governments 250 billion USD a year in oil imports and cut expected growth in global oil demand by 70%.
Whilst NIO’s Sedan may be set to disrupt numerous markets, internal issues that troubled the company in the past may still be a cause for concern for investors. NIO started 2020 in a tenuous position even before the pandemic, due to the five years of unchecked growth, a product of NIO’s management failing to control the rapid expansion of the business. Despite starting production on a second, more affordable SUV, the ES6, in 2018, NIO’s balance sheet was negative (more cash outflows than inflows). This meant it had less than 300 million USD in the bank to start the final quarter of the year. NIO even began 2020 with a warning to its investors that they did not have enough capital to finish the year. Only upon receiving a 1 billion USD state-backed investment in early 2020 did NIO’s New York-listed shares begin to recover and closed the year up well over 1,000%. However, the manufacturer has an SMR Rating of D, on a scale of A+ to a worst E. The SMR Rating measures sales growth, profit margins and return on equity. This leaves investors uncertain as to whether NIO is in a poorly leveraged position.
Moreover, NIO faces valuation issues associated with their industry’s rapid expansion, especially in China. Many investors believe that the EV manufacturer is still overvalued. NIO reported its Q4 2020 results, posting a smaller than expected quarterly loss, driven by record deliveries and higher margins. Revenues increased by 22% to about 667 million USD. Gross margins expanded by about 480 basis points to 12.9%, driven by lower material cost and better manufacturing efficiency. NIO also continues to benefit from strong demand and incentives for EVs in China, such as BAIC and GAC. Equally, NIO’s stock price is up by over 12x year-to-date and trades at about 27x projected 2020 revenues. As such, data analysis think-tank Trefis Team suggest NIO’s growth rates are certainly higher than Tesla’s (at 13%), but also ‘riskier’ considering the intense competition in the Chinese EV market, which has several hundreds of manufacturers. Thus, despite stronger than expected results in Q4, it’s plausible to assume NIO’s stock may be overvalued and vulnerable to a future reduction in price.
NIO’S new model, coupled with its wide portfolio of cars, from ‘hypercars’ like the EP9 to family SUV’s such as the ES8, puts the firm at the forefront of the EV industry, especially in China. Despite the manufacturer’s unconvincing history, the technology and structure of its latest model sets precedent for EV manufacturers, including Tesla. Whilst the new model promises revolutionary technology that may differentiate NIO’s business offering, the foundations of NIO’s business and market saturation still generate investment uncertainty. It could be that NIO’s growing dominance in the region proves to be the needle that pops Tesla’s growing bubble.
By Tarun Odedra
Sector Head: Jared Gibson