NIO (NYSE:NIO) stock has been absolutely on fire over the past year, and the rally simply refuses to stop. Over the last twelve months, NIO stock has soared more than 1,500%, including a recent 20%-plus pop to fresh all time highs in October on the back of a big upgrade from JP Morgan, who hiked its price target on the stock from $14, all the way to $40.
At some point, this rally has to cool off, right?
Sure. But not anytime soon.
The reality is that China’s auto market is huge. That huge auto market is being rapidly electrified and NIO is the most dominant luxury player in that market. Over the next several years, NIO is gong to sell a ton of premium EVs to Chinese consumers, and as the company does, NIO stock is going to keep marching higher.
How much higher?
My previous modeling called for a long-term price target of $40 on NIO stock. It has become increasingly obvious that this price target is based on conservative modeling. After revising my numbers to account for recent business momentum, I now see NIO cruising above $60 in the long run.
That’s nearly triple today’s price tag. So, needless to say, the stock is still a long-term buy-and-hold today, even on the heels of an enormous 2020 rally.
The Bull Thesis
The bull thesis on NIO stock is shockingly simple.
China is the largest country in the world, with 1.4 billion people. A natural byproduct of having so many people — most whom are rapidly urbanizing — is that China’s auto market is also the largest world, clocking in at around 20+ million new passenger cars sold every year.
Mostly due to an abundant and glaring need to reduce to carbon emissions throughout the country, China’s government has been hyper-aggressive when it comes to promoting EV adoption in the country, through subsidies and tax breaks. To that end, China’s EV market today is one of the most established in the world, with a ~5% penetration rate.
Robust government support of EV adoption will not wane in future years. China remains committed to a 25% EV penetration rate by 2025. So, over the next several years, China will lead the word in the EV revolution, and the country’s enormous, 20+ million car market will be massively electrified.
In that market, NIO is the leading player in the luxury segment, with a portfolio of very aesthetic, trendy and high performance EVs. These cars have ultra-long driving ranges, recharge very quickly, sport luxury leather interiors, are fully tech-integrated … basically all the luxuries you’d expect. They are, for all intents and purposes, the best luxury EVs in China.
NIO is going to sell a lot of these EVs over the next several years, especially since: 1) the company has fostered exceptionally strong brand equity thanks to its exclusivity oriented marketing strategy; 2) the company is employing a battery-as-a-service model in which consumers will “rent out” batteries (not own them), thereby reducing the list price of the vehicles by ~$10,000; and 3) NIO has gone from one model to three models in just two years, with the implication being that the automaker will expand its vehicle portfolio dramatically throughout the 2020s.
All in all, then, NIO will lead the luxury segment of China’s booming EV market over the next decade. As the company does, NIO stock will fly higher.
The Numbers to Get to $60
In numbers, I see NIO stock running to prices north of $60 in the long run.
This is up from my previous long-term price target of $40, with the upward revision coming from a few big changes in my long-term model on the company, including:
- Revising China’s passenger car market size higher to 30 million cars sold in 2030. This revision is mostly a result of the fact that the novel coronavirus pandemic has depressed the prevalence and usage of ride-sharing globally, and prompted many young consumers to turn into first-time car buyers.
- Revising China’s 2030 estimated EV penetration higher from 35% to 40%. This revision is a result of accelerating momentum in China’s EV market in 2020, which has now grown big year-over-year for two consecutive months (despite the pandemic) and appears to be fully back on a 20%-plus growth track.
- Revising NIO’s 2030 estimated EV market share higher from 5% to 8%. This revision is due to two things. One, increasing demand in China’s luxury car market shows that the premium EV segment at scale will be bigger than 10% of the total EV market. Two, NIO’s new battery-as-a-service model significantly lowers initial price points, and will help NIO win some non-luxury car market share.
Thanks to these upward revisions, I now see NIO delivering about a million EVs in 2030, equating to about $40 billion in revenues (based on a $40,000 average sales price) and about $3.75 in earnings per share (based on ~12% operating margins, a 20% tax rate, and just over a million shares outstanding).
Based on a 17X forward price-to-earnings multiple — which is the historically average earnings multiple for the S&P 500 — that implies a long-term price target for NIO stock of over $60.
Bottom Line on NIO Stock
NIO stock is a long-term winner.
There’s really no other way to put it.
This company is emerging as the dominant premium car maker in China’s burgeoning and soon-to-be-huge EV market. So long as the company maintains this favorable competitive positioning amid surging demand for EVs, NIO will be worth a lot more than $30 billion in the long run.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.