Thesis

NIO Inc. (NYSE:NIO) continues to strategize and adapt in order to maximize its growth potential and secure a significant market share. With a strong surge in demand for its latest E6 model, an innovative BaaS program, and newly unveiled flagship SUVs, the company positions itself to capitalize on the rapid expansion of the EV market. While the increased deliveries and overwhelming response to the new launches are encouraging, the challenge remains in NIO’s ability to maintain the momentum in the long term and navigate challenges such as battery price fluctuations and increasing competition. The company’s financial performance, marked by consistent revenue growth but ongoing negative EPS, underlines the volatile but promising phase of hyper-growth that NIO is currently navigating. Amid these dynamics, NIO’s commitment to ESG considerations sets it apart, with an ‘A’ rating by MSCI and alignment with the UN Sustainable Development Goals, demonstrating a comprehensive and responsible approach towards growth.

Introduction

NIO Inc., a pioneer in the premium smart electric vehicle market, is a Chinese multinational automobile manufacturer headquartered in Shanghai. Founded in November 2014, NIO has been at the forefront of designing and developing electric vehicles, with a mission to shape a joyful lifestyle. The company has introduced an innovative Battery-as-a-Service (BaaS) model, offering battery-swapping stations as an alternative to conventional charging stations. This unique approach has revolutionized the EV industry, making the purchasing decision much easier for potential buyers. NIO’s core businesses are based in the Hefei Economic and Technological Development Zone, with a global R&D center for software in Beijing. Additionally. NIO’s stock has absolutely plummeted, down over 60% in the last year providing investors with potential buying opportunities.

Electric Vehicle Industry Growth

As we all know, NIO is a part of the rapidly growing electric vehicle industry, which is expected to grow at a CAGR of over 17% to reach an estimated market value of $858 billion by 2027. This demand can largely be attributed to government initiatives to increase the amounts of electric vehicles to reduce global emissions. Additionally, China has the second highest density of EV chargers compared to other countries with around 3-4 chargers per 100km. This is one of the most optimistic areas for NIO’s growth potential since China has one of the best infrastructures set up to support the shift the EVs. With surging demand for EVs in general, NIO can potentially capitalize on this and become profitable.

Surging Demand for New E6 Model

NIO has recently launched the second version of its most popular model, the E6 SUV. After only being on the market for 3 days after the announcement, they had already received over 30,000 pre-orders for the car. This highlights that the demand for NIO is certainly there given that over 6,600 of these orders are confirmed with the cancellation rate expected to be only around 10%. However, the real test will be in NIO’s ability to fulfill these orders in a timely and efficient manner. This is because delays or complications in the production process could impact customer satisfaction and the company’s reputation. As such, we will have to wait and see how they will perform.

NIO has also reported record monthly deliveries as China eases its COVID-19 policies. However, it’s important to note that while these record numbers are promising, they also reflect the pent-up demand resulting from previous restrictions. As such, it remains to be seen whether this high level of deliveries can be sustained in the long term and if demand will keep up in the long term, especially with the huge amount of competition NIO faces with XPeng (XPEV), Li Auto (LI), and Tesla (TSLA).

BaaS Model Developments:

In the sphere of electric vehicles, NIO has positioned itself as a trailblazer with its Battery-as-a-Service (BaaS) model. Launched in August 2020, this service leverages the concept of vehicle-battery separation, consequently altering the traditional car purchase system. Rather than incurring upfront costs for the battery, which can be a significant portion of an EV’s price, NIO’s customers can opt for a subscription model for battery packs. As such, they are allowed to select from an array of battery capacities that align with their usage requirements and they are able to pay on a monthly basis.

NIO’s BaaS model has not only simplified purchasing decisions but also struck an optimum balance between initial expenditure and recurring usage costs. Moreover, this innovation empowers customers with an economically viable alternative to Internal Combustion Engine (ICE) vehicles, as it results in overall lower costs. Furthermore, BaaS presents a resolution to persistent hurdles in the EV market such as concerns regarding battery degradation, upgradability, and lower resale value.

Recent amendments to the BaaS program further demonstrate NIO’s commitment to customer-centricity. NIO now permits customers to opt out of the battery swap and purchase their EV battery, thereby offering more flexibility and control over their vehicle’s energy source. Despite the increased attractiveness of the BaaS model, the growing inclination of customers towards battery ownership might raise questions about the long-term viability of this program.

Catalysts For Growth

Just a few months ago, a significant stride was made by NIO as they announced their plans to construct two new EV factories. This bold step underlines their commitment to expanding their production capabilities. It’s more than just a move to increase factory floor space; it’s a proactive maneuver to meet the burgeoning demand for EVs, potentially catapulting NIO to the forefront of the global EV market.

December 2022 marked another milestone for NIO. They unveiled their two-flagship electric SUVs: the ES8 and EC7. With this move, NIO made a strong statement of expansion in its product line. The ES8, luxury in the form of a large three-row SUV, stands as a testament to NIO’s success. The figures speak volumes-over 65,000 units of this model have found owners in the past five years. But NIO isn’t resting on its laurels. The 2023 ES8 model is all set to elevate passenger comfort with an increased length and three-row seating. Luxury takes the front seat with features like ‘one-click’ seat adjustment, hot stone massage, and a remarkable 22-way adjustable seat.

The EC7, however, takes a different route. This coupe-style crossover screams performance and style, mirroring the sleek design of the ET5 mid-size sedan. Its drag coefficient even bests the Tesla Model X, earning NIO’s claim of it is the world’s most aerodynamic SUV. Under its hood, a dual-motor/all-wheel-drive powertrain takes it from 0-100km/h in a breathtaking 3.8 seconds.

Nevertheless, it’s vital to bear in mind the fierce competitiveness of the electric vehicle market. New models are unveiled regularly and despite the impressive nature of NIO’s offerings, the company must continuously innovate to hold its ground.

Financial Overview

With a market cap of just under $13 billion, NIO is a small and relatively new company that simply needs to become profitable. Its revenue is growing rapidly, increasing from $5,686.3 million in 2021 to $7,143.5 million in 2022, which is over 36% YoY.

Despite the consistent revenue growth they have demonstrated, NIO’s EPS remains negative, with expectations still projecting negative EPS by the end of 2024. Their revenue is expected to grow to over $17 billion by the end of 2024, which would be more than double in just a 2-year period. However, these numbers do not make up for their operating costs. Thus, NIO has extremely high growth potential but remains very risky due to the hyper-growth phase that they are in. I would like to see if they can demonstrate consistent signs of profitability and improve their margins over the coming years.

Q1 Recent Earnings and Guidance

In Q1 2023, NIO reported strong revenue growth but a larger-than-expected net loss. Revenues reached $1.50 billion, a 7.7% increase YoY and a 33.5% QoQ decrease. However, EPS was still negative at -0.41, with gross margins decreasing from 14.6 in Q1 of 2022 all the way down to 1.5% in 2023. This can largely be attributed to the massive 74.6% YoY increase in R&D spending. For Q2 2023, NIO expects to deliver 23,000 to 25,000 vehicles with ES6 production expected to ramp us and with plans to launch the NIO ET5 Touring in mid-June. Despite the losses, NIO’s revenue growth and optimistic guidance indicate the potential for continued growth amid challenges. However, improving profitability remains a crucial factor for its long-term success.

Valuation

In terms of valuation, it’s very tough to truly analyze given that their EPS is still negative. However, we can take a look at its P/S ratio for some guidance. NIO’s P/S ratio of 1.76 is above the sector median of 0.80 potentially indicating that they are overvalued. However, this number is down over 80% from NIO’s 5-year average. This simply tells us that the market is giving NIO a lower multiple likely due to decreasing hype over the company. However, the growth prospects remain just as strong, and a reversion to the mean may occur. Thus, if you are confident in NIO’s ability to establish itself in the coming years, it is certainly trading at a very attractive level. However, this is still very speculative given that the company is so new and the multiples the market will give it are likely to fluctuate greatly until it can establish some level of maturity as a company.

Risks

The landscape of the electric vehicle market is undeniably competitive. NIO finds itself in the line of fire, confronting formidable adversaries, both domestic, such as Xpeng and Li Auto, and international, with Tesla. Moreover, Tesla’s decision to slash its vehicle prices in China has created ripples in the market, adversely influencing NIO’s sales figures. If Tesla’s aggressive pricing persists, NIO may have to brace for a potential contraction in its market share. However, this risk may be partially mitigated as NIO’s vehicles command a better reputation compared to Tesla in China for their superior technology.

Simultaneously, NIO’s growth has been supported by government policies, given the significant boost the Chinese EV market has received through subsidies. These fiscal incentives have traditionally helped buyers offset the costs associated with EV purchases. As the government phases out these subsidies, the demand for EVs could see a downward shift due to reduced buyer incentives, thereby adding a layer of uncertainty to NIO’s future growth.

Finally, the geopolitical tensions between the U.S. and China present a significant risk to the global EV industry at large and NIO in particular. NIO’s ambitions to extend its footprint beyond China could be ruined by the escalating political discord. This backdrop of political volatility could jeopardize the prospects of Chinese car manufacturers hoping to penetrate international markets with their products, thereby introducing an additional element of risk for NIO’s expansion strategy.

ESG

With an MSCI ESG rating of A, NIO is close to being a leader in the automobile industry.

They are also leaders in areas of corporate behavior and opportunities in clean tech, which makes sense considering they make EVs. However, they are considered a laggard in a couple of key areas, including corporate governance and product safety and quality. They are also considered to be aligned with the UN Sustainable Development Goal of Responsible Consumption and Production. While not being exceptional, NIO is still performing relatively well in ESG metrics, which I see to be quite exceptional given that are in a very growth-focused phase and may not necessarily be caring that much about their ESG.

Conclusion

While NIO Inc. continues to carve a significant niche in the fast-paced EV industry, the complex mix of opportunities and challenges shapes its journey. The company’s ongoing development and innovation, exemplified by its newest models and services, underscores its commitment to meeting the escalating global demand for electric vehicles. As NIO navigates an intensely competitive landscape and grapples with geopolitical tensions, its ability to maintain growth momentum and improve profitability will remain to be seen. With the backdrop of consistent revenue growth and an ESG-focused approach, NIO represents a case of a trailblazer in the EV market. As the company looks toward the future, a strategic focus on innovation, financial resilience, and sustainable growth will be imperative to secure a leading position in the global EV revolution. These variables will be key to watch, and as for now, NIO is a “hold.”

Analyst Recommendation by: Vayun Chugh

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