Will Nio recover in 2022?
China is an attractive market for electric vehicle (EV) investors. Global sales of electric vehicles are estimated at around 6 million units for 2021. Of these, China alone is expected to account for around 2.9 million units.
Still, investors remain skeptical about investing in Chinese stocks. Given some key developments in China in 2021, such skepticism seems reasonable. However, assuming you’ve already factored this risk into the context of your portfolio, let’s see if it’s a good idea to buy. Nio (NYSE: NIO) stock at the moment.
Nio operates in a competitive market
As a leading market for electric vehicles, China obviously attracts the best global players. Nio competes with established players including BYD and You’re here, as well as with new entrants, including Li Auto and XPeng. In addition, Nio also faces competition from historic car manufacturers, especially Volkswagen and General Motors, which seek to capture a portion of China’s rapidly growing electric vehicle market.
In November, BYD sold 90,546 electric vehicles in China, compared to around 10,700 vehicles delivered by Nio. For comparison, Tesla sold 52,859 electric vehicles in China in November.
There is a lot to love about Nio
After launching its first car in 2016, Nio has delivered more than 156,000 electric vehicles to date, including 80,940 delivered in 2021 (until November). The company’s recent sales growth indicates strong demand for its vehicles.
Among purely Chinese electric vehicle companies, Nio is a leading player in terms of turnover and revenue growth. Notably, BYD only derives just over half of its revenue from vehicle sales. There are some key factors that differentiate Nio from its competitors.
First, Nio’s innovative Battery-as-as-Service model allows its users to swap their electric vehicle batteries for new ones at one of the company’s 700 battery swap stations. Users can quickly swap out their discharged batteries if they run out of time to recharge them. Alternatively, they can choose to swap out a battery and go for a larger or smaller pack, depending on their specific needs. Nio has completed over 5.3 million battery swaps so far, indicating high demand for the same.
Second, Nio is launching two new models: the ET7, a luxury sedan, and the ET5, a mid-size sedan. Additionally, the company will launch a third new model in 2022, which has yet to be unveiled. Few of its competitors plan to launch so many new models in the year. In addition, these upcoming models are expected to be some of the best in their target segment.
ET5 and ET7 both come with a monthly subscription of 680 renminbi (RMB) (around $ 106) for autonomous driving updates. Additionally, both have different battery options, from a standard 75 kilowatt-hour (kWh) battery (70 kWh in ET7) to a 150 kWh battery, which can travel 620 miles on a single recharge. ET7 deliveries are expected to begin in March and ET5 in September.
The ET5 model is priced at 328,000 RMB (around $ 51,500) while the price of the ET7 starts at 448,000 RMB (around $ 70,300). Both of these new models are expected to receive a positive response from customers, increasing sales of Nio in 2022. This could also support the share price in the new year.
Is Nio share a buy?
Nio stock trades at a forward price to sales ratio of approximately 4.6. It is comparable to that of its peers Li Auto and XPeng. However, Nio’s ratio improved significantly from around 10 in January 2021.
By comparison, BYD stock trades at a price-to-sell ratio of around 3. As Nio is still not making a profit, the price-to-sell ratio is useful for comparing its valuation against its peers. A lower gear is considered better.
Again, Nio stock looks much better valued than stocks of U.S. electric vehicle companies, such as Rivien Where Lucid, each of which has so far delivered only a few hundred vehicles.
In addition to the Chinese domestic market, Nio is targeting European markets for its expansion. It started deliveries to Norway in September and is looking to enter five more countries in 2022. If successful, this expansion will make Nio one of the leading manufacturers of electric vehicles that can meet global quality standards.
Despite the competition, Nio has increased sales so far. Its upcoming models, international growth plans and innovative offers position it well for long-term growth. Growth prospects, combined with a relatively attractive valuation, make Nio stock attractive at the moment.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.