With share prices down 26% over the last 12 months, Nio (NYSE: NIO) stock hasn't been a very rewarding investment -- especially compared to popular electric vehicle (EV) maker Tesla, which more than doubled in the same period. With that said, the Chinese company boasts an impressive growth rate and several key innovations to help set it apart from the competition. Let's explore what the next three years could bring.
What is Nio's niche?
The Chinese EV market is competitive, and automakers must offer a unique value proposition to stand out. For Nio, this involved targeting the premium side of the industry with new products, such as its ET9 sedan, expected to retail for 800,000 yuan ($112,151) when it becomes available in 2025. But Nio's efforts don't end there.
Unlike rivals, Nio has pioneered a unique charging strategy called battery as a service, allowing customers to subscribe to a program for swapping batteries at any of its 2,200 global swap stations. According to management, its technology can exchange spent batteries for new ones in three minutes. This is significantly faster than Tesla superchargers, which take 15 minutes to fill a battery up to provide 200 miles of service.
Nio plans to build an additional 1,000 swap stations in 2024. And investors should expect the company to ramp up this strategy over the next three years. This could boost its economic moat against other automakers while opening up additional revenue opportunities (such as licensing fees) as other companies design their cars to share its technology.
In November, Chinese automaker Geely (owner of Volvo) inked a partnership with Nio to work together on standards and tech for battery swapping -- a vote of confidence in the battery-as-a-service strategy.
Operational results are mixed
While Nio's strategy is exciting, operational results are mixed. In its unaudited third-quarter results, vehicle sales rose 47% year over year to 17,408.9 million renminbi ($2.38 billion), which is encouraging considering the ongoing price war in the EV industry. But the company generated an operating loss of $663.9 million, up 25% compared to the prior-year period.
Growth-oriented companies often generate losses as they scale up their operations. However, the fact that Nio's losses are still increasing instead of decreasing suggests the company is still in a relatively early stage of building out its business model. And that makes it riskier.
Over the coming years, investors should watch for equity dilution, which is when a company issues additional shares to finance its operations. While this strategy can help it generate the funds needed to survive, it can also cause the stock to underperform because it reduces current shareholders' claim on future earnings.
An incredibly low valuation -- with a catch
With a price-to-sales (P/S) multiple of just 1.95, Nio's stock is extremely cheap compared to U.S-based alternatives like Tesla, which trades for a P/S of 8.62, or Rivian Automotive, which trades for 4.73. This is surprising considering the Chinese company's rapid revenue growth rate and unique product differentiation strategy. But the disparity may have something to do with its jurisdiction in China and unaudited U.S. financial results.
Chinese companies are not held to the same reporting standards as their American counterparts. And even if they are doing everything correctly, this seems to lead to a sharp discount in their valuations. Ongoing U.S.-China trade tensions further compound the issues.
For investors, this means that Nio's low stock price isn't necessarily as inviting as it looks because the discount could remain even as operational results improve. And while Nio could earn the market's trust over the next three years, the stock looks like a hold until more data becomes available.
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