Electric vehicle (EV) stocks were some of the biggest winners in 2020. And even though people are beginning to question the ratings these companies have achieved with investors’ exuberance, they continue to rise.
Tesla (NASDAQ: TSLA) attracted a lot of publicity, so it may surprise you that the shares of the Chinese manufacturer of EV NIO (NYSE: NIO) significantly outperformed Tesla’s last year. This is worth investigating if NIO is still a purchase for 2021.
NIO ET7 luxury sedan. Image source: NIO.
Investor enthusiasm
Tesla’s meteoric rise was the subject of many headlines last year and prompted speculative investors to seek “the next Tesla”. An obvious place to look was the largest automotive market in the world. Even in early 2020, NIO’s business flirted with bankruptcy. But an impulse by the Chinese government to accelerate growth in the country’s EV industry contributed to strong sales growth and investors piled up.
NIO data by YCharts
As the stock soared, the company also took the opportunity to raise the necessary capital. This diluted existing shareholders, as can be seen in the faster growth of the company’s value compared to the stock price.
Solid growth rate
Although not growing as fast as the stock price itself, NIO’s business is growing at a very strong pace. Vehicle deliveries increased 113% in 2020 compared to the previous year. 2020 represented almost 60% of the company’s overall cumulative vehicle deliveries.
But with just under 44,000 vehicles, that’s still less than 1/10 of Tesla’s 2020 volume. NIO is expanding its product offerings with a new luxury sedan announced at the recent “NIO Day” presentation. The ET7, which will be NIO’s first sedan, comes with a new battery larger than 150 kWh. It will have a maximum range of about 621 miles, according to the company. This is beyond the maximum range of the Tesla Model S of 402 miles, as well as the Lucid Motors Range of the 517 mile aerial sedan.
Market opportunity
EV sales in China exceeded 1 million in 2020, and the government plans to expand to 5 million by 2025. That number could reach 10 million in 2030 and approach 20 million in 2040, according to the research organization. BloombergNEF.
Competition is also growing, however. Tesla delivered its first mid-size Model Y SUV from its Shanghai plant just this month. Other Chinese EV companies are also increasing sales at three-digit rates, so NIO is far from the leader in the country. Supported by Warren Buffett BYD (OTC: BYDDY) sold almost 131,000 battery-powered electric vehicles (BEVs) in 2020, and more than 460,000 vehicles in total.
There is clearly more room for exponential growth in vehicle sales in the coming years, and the introduction of NIO’s ET7 shows that the company plans to play a big role. NIO is also innovating with a battery change program that allows customers to “recharge” through a faster battery change. The company says its automatic battery change stations take just three minutes for a fully charged replacement.
Will the stock follow?
As with other names like Tesla, the issue that investors struggle with is the appreciation of stocks. NIO’s total revenue in 2020 through the third quarter was almost $ 1.5 billion, and the year 2020 is expected to approach $ 2.5 billion.
But the company has not yet made a profit, so examining the price / sales ratio is the best way to assess the valuation. With a current market capitalization approaching $ 100 billion, NIO trades at almost 40 times sales in 2020, and what is estimated to be around 20 times sales in 2021.
By this metric, it is valued higher than Tesla. Considering competition and uncertainty in the future, there is more risk of downside than potential of upside now in NIO shares.
Investors are betting on the huge market potential for EV growth. If all goes well for NIO, the shares may outperform from here. But if you add it to a portfolio today, you must also be prepared for exaggerated losses. This is the definition of a speculative investment.