NIO Inc. (NOK) designs and manufactures high-tech electric vehicles in China. As a major and innovative player in connectivity technologies, autonomous driving and artificial intelligence, it competes directly with Tesla (TSLA).
The main value for NIO comes from its competitive positioning in the market for luxury electric vehicles (especially SUVs) in China, derived from its comparable technology combined with its lower price.
Furthermore, as a leading and innovative local manufacturer in high priority cutting edge technology fields, the Chinese government has a vested interest in NIO’s continued growth and success. Not only should this lead to continued financial support in tough times, it can also lead to government-controlled media arousing popular opinion against its main competitors, as it has recently done with TSLA. (Lake Nio stock chart in TipRanks)
The company is expected to continue to generate strong growth thanks to the reopening of the global economy following the COVID-19 outbreak, as well as the continued robust growth of the Chinese middle class. Furthermore, as its advanced automotive technologies continue to emerge and gain a larger share of the overall global automobile market, demand for its products and technologies should grow.
That said, the company also has numerous challenges to tackle. First, you already face significant competition from larger companies, such as TSLA, which possess powerful innovative capabilities and strong branding images. Also, as a Chinese company, you face significant political risk (like Alibaba (SLIME) recently learned the hard way), accounting risk and execution risk. The last risk is due to the fact that it is still a smaller scale business that must meet aggressive growth expectations.
Despite these challenges, NIO still has a strong position in the space, giving it a significant advantage to leverage in terms of network and industry-specific consumer data. However, its valuation remains high. The forward price for cash flow is a whopping 95.6x, and the company is still not profitable on a GAAP basis, while simultaneously bleeding cash.
The good news is that revenue is expected to triple over the next two years and the business should finally be profitable on an EBITDA basis in 2022, although the EBITDA margin is likely still very slim at just 2.3%.
Between your backing from the Chinese government and your $ 47.2 billion arsenal of short-term investments and cash, you should have the financial backing you need to fund your ambitious ventures and reach profitability in a few years. However, it remains highly speculative given that it must meet massive growth expectations in a short period of time, in the face of significant challenges.
Taking of Wall Street
From Wall Street analysts, NIO obtains a Strong Buy analyst consensus based on 8 Buy ratings in the last 3 months. In addition, the Nio analyst average target price of $ 61.91 puts the upside potential at 31.98%.
Summary and conclusions
NIO is a highly speculative investment at the moment as it is highly valued. Therefore, you must meet very high expectations against numerous risks to offer long-term investors a respectable return.
That being said, it still has a lot to offer. Nio is strengthened by its status as a national leader in high-priority, cutting-edge technologies and a high-visibility global industry. The Chinese government is likely to continue to help the company directly and indirectly move forward, and the strong tailwind from China’s growing middle class should also boost Nio significantly.
Overall, business is likely to continue to grow and analysts remain bullish on stocks here. That said, given its high valuation and steep rise to profitability against top-tier competition from companies like TSLA, the stock is still a risky bet. Investors may be wise to take this into account before establishing a position.
Disclosure: As of the publication date, Samuel Smith did not hold a position with any of the companies mentioned in this article.
Disclaimer: The information contained therein is for informational purposes only. Nothing in this article should be taken as a request to buy or sell securities.