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Nio (NIO) is an Electric Vehicle manufacturer with a unique twist. Instead of plugging your car to charge, you can pull up to a Power Swap station and change your battery for a fully-charged one in less than 5 minutes.
Cool, unique technologies combined with high-end, beautifully designed cars make for good growth stories, resulting in NIO's stock being one of the most researched stocks on the market. Do the swappable battery technology and its premium brand give the company an edge over other EV makers? Some investors certainly believe so and go to the extent of calling Nio the next Tesla. Is Nio truly the next Tesla?
Let's talk about that!
I'm Hoda Mehr, founder, and CEO of Stock Card, and on this blog and its accompanying YouTube channel and Podcast show, I share detailed fundamental analyses and interesting investment stories.
This post is part of a series I started a few weeks ago to fundamentally research companies to manage my real-money portfolio. I've already researched Canopy Growth (CGC), Fastly (FSLY), Snap (SNAP) , Shopify (SHOP), Airbnb (ABNB), Unity (U), JD.com (JD), NVIDIA (NVDA) and several others. I'll continue with this series for a few more weeks.
Remember, this content is for education and sharing ideas and not advice to buy or sell any securities.
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The last time I looked at Nio was four years ago when the company was about to run out of cash. I'm surprised to see it is still around. Manufacturing cars are hard and capital-intensive. And Nio isn't the only EV maker in its core market in China. The fact that the company is still around makes me wonder whether there is more to Nio's story than meets the eye.
The market seems quite excited about NIO since the price is up by more than 30% in the last month after hitting a 52-week low of $7 per share due to a gloomy quarterly earnings report released in June. Perhaps, just like Tesla, which was once running out of cash, Nio has found its way through challenges and is becoming the next Tesla.
Nio is a $15B EV manufacturer in China that made about $7B in revenue in the last fiscal year. It makes most of its revenue from selling new cars, and additional revenue comes from services, financing, and second-hand car sales. While the company is focused on the Chinese market, it also has a presence in a few European countries, such as Norway and Germany. It is currently priced at 2.5 times its sales. Compared to other EV stocks, such as Tesla, at more than 11 times price-to-sale, the stock seems quite undervalued. We need to know what?
Typically, I follow a 6-part fundamental analysis to decide whether I'd be investing in a company or not. Today, I'll change the flow and give you a quick recap of Nio's fundamentals at the beginning, and then spend more time on a qualitative assessment of Nio. That's because, as you will see in a second, if I just use a fundamental analysis of the company's financial information, Nio won't make the cut.
Sometimes, when you invest in a growth company and want to find the next Tesla, it is worth taking risks for a shot at gaining a significant return. In those cases, in addition to analyzing a company's fundamentals, you look for early signs of growth despite struggling financials. Before investing in early-stage companies, I typically look at five important growth criteria:
So today's question isn't whether Nio is financially solid. It's whether Nio is investable despite apparent financial risks in its fundamentals.
Nio's Fundamental Analysis Recap
When I pull up the company's Stock Card, I see a company struggling financially.
Let's recap Nio's fundamental analysis:
In summary, the company has struggling fundamentals with good targets in the second half of 2023 and beyond. If it manages to reach some of its targets regarding deliveries, revenue from new vehicles line-up, and profitability, it will be in a much better fundamental position. However, looking at the current fundamentals we just discussed, it becomes easy to understand why the stock is priced only at 2.5 times sales. The market sees the same red alerts as we do.
If we are interested in investing in Nio purely based on fundamentals, we have to wait and see how it implements its plans in the next few quarters or take a bet on the possibility of it reaching its targets. There are still a lot of unknowns in the company's operations.
Nio's Qualitative Assessment
Like all EV companies, Nio benefits from a rapidly growing market and a shift in consumer preferences toward EVs over combustion engine vehicles. For example, in Nio's core market in China, the EV sector is expected to grow by 25% per year, which results in organic growth. This is most likely the primary reason Nio hasn't run out of business despite its cash availability challenges in the past. There is a lot of excitement around EVs globally, and many large investors are willing to fund EV manufacturers, not too dissimilar to Tesla's early days.
As we discussed, the company makes EVs with swappable battery packs instead of waiting to charge your battery. You can enter a Power Swap station and swap your car's battery with a fully charged battery very quickly and be on your way. There are currently about fifteen hundred Power Swap stations worldwide. Considering reasons to invest in Nio despite its alarming financial struggles, the swappable battery pack and stations is a unique technology that can give the company an edge over other EVs.
Mind you, Tesla has also had a swappable battery plan with one station in California. But the company focused on expanding its charging stations. It makes you wonder if the technology is available to other EV makers, then it isn't as unique or economically viable as we hoped. Nio cars can still be charged in a charging station. Because the battery pack itself is the single most expensive part of an EV, it isn't feasible for individual users to buy spare batteries at home. Nio still needs to make chargers available and invest in its swap stations. Double the CapEx investment, double the hassle.
We know Nio isn't profitable, and with all the capital expenditures required to build its Power Swap stations and charging network, ramping up sales and marketing for its new car models, there is certainly a limited expectation of profitability or free cash flow in the near future. The management has promised profitability at the end of 2023 due to a significant increase in the number of deliveries. But that's yet to be seen and proven by its sales and delivery performance in Q2 and Q3. This makes me wonder if the sales and deliveries do not ramp up as fast as we hope, does the company have enough cash to continue investing in its growth?
Based on that last quarterly earnings report, while Nio had about 40B in Chinese Yuan in cash, it also carried the same amount in current liabilities. At 0.14 Chinese Yuan to USD conversion rate, that's about 5.5 billion US dollars in cash and current debt. Moreover, the company carries a total of 65 billion Chinese Yuan in current and long-term liabilities combined, reducing its financial resilience and strength to keep building.
There is some good news related to its balance sheet, though. Only a few days ago, the company announced a $738.5 million dollars investment by an investment company majority owned by the Abu Dhabi Government. The Abu Dhabi Government investment also comes with a board seat, giving the investment company a 7% ownership in Nio. Not all of the investment is in cash. Rather, a portion of it is paid to Tencent to purchase Nio shares. So the investment can add some cash to Nio's balance sheet, but it is more of a strategic investment that potentially opens the Middle East's EV market door to Nio.
Is Nio The Same As Tesla
Overall, Nio is a risky bet, just like how Tesla once was, with limited fundamental strengths to support it now. Just like old Tesla, there are good plans and targets that, if they pan out, the company will be in a much better position. Like Tesla, it has a strong brand and cool swappable battery technology too. But, it doesn't have the same first-mover advantage that Tesla had and has to compete with 16 other EV makers such as Tesla and BYD in its core China market and European EV makers in its new markets.
It's an investment bet that can win you a significant return, especially at only 2.5 times price to sales valuation ratio. But you accept the significant financial risk if the new vehicle lineup doesn't sell as fast or the company doesn't reach its profit margins.
What To Expect In Nio's Next Earnings Report
If you have your eyes on it, remember that the next quarterly earnings report is expected to come out in August. You can get the date by clicking on the Key Dates section of the company's Stock Card. When the earnings come out, watch for a few things:
Despite everything I discussed today, Nio's stock may still go up. There are forces in place that can push Nio's stock price up just the same as the 30% growth in the last month. For example, any positive news around deliveries and the U.S.-China relationship can be catalysts for Nio. Also, if the Abu Dhabi government continues its investments or subsidizes the development of manufacturing facilities in the Middle East, we will most likely see a price spike.
For me, I don't think Nio's risk is still justified. I could be wrong. You have to do your own research.
See you next time!