Chinese manufacturer of electric vehicles
provides a cautionary tale for
investors. What happened to his stock could happen
if volume growth at
follows a similar path as its Chinese rival.
) stock has had a brutal run of late, falling about 30% so far this year. Shares are down about 60% from their 52-week high of more than $55 and nearly 70% from their all-time high of nearly $67. All this despite a recent rebound. NIO shares, trading around $23, bottomed at less than $12 in mid-May.
Baffled investors are probably wondering how things got so bad so quickly. Some candidates are to blame. Fears of a US delisting of Chinese stocks resurfaced in 2022. In addition, inflation and Covid-19 were problems. Still, NIO colleagues
(LI) faced the same issues and the shares of these two EV manufacturers have held up better than the NIO shares.
It’s hard to blame NIO management for the underperformance. The company has never missed Wall Street sales estimates when reporting quarterly or full-year numbers. And NIO continues to introduce new models for Chinese EV buyers. The latest new NIO model is an SUV called the ES7.
The problem for the stock is simply unit growth. NIO has been stuck in a range of around 10,000 monthly shipments for almost a year. Growth investors find that unacceptable.
“NIO is a cautionary tale for Tesla and the entire electric vehicle industry,” said Dan Ives, analyst at Wedbush Barrons. “It’s about scale and scale of production, [which] eventually became the albatross of NIO last year. The multiple was destroyed when growth slowed dramatically.”
Ives doesn’t cover NIO stocks, but he is a Tesla (TSLA) bull with a Buy rating on stocks. Its price target is $1,000 per share.
In early 2021, shortly after NIO held an event for consumers and investors, shares were trading at about 18 times estimated 2021 sales. Tesla was trading at around 16 times estimated sales at the time. All multiples have fallen in the bear market, but NIO stock now trades for about 4 times estimated 2022 sales, a huge discount from the 8 times multiple for Tesla stock.
Tesla’s multiple has held up better because the company has managed to sustain faster volume growth than NIO. Tesla has opened new manufacturing facilities and expanded its existing plants to keep deliveries growing quarter-on-quarter and year-on-year.
Tesla’s deliveries in the first quarter of 2022 grew about 68% compared to the same period last year. NIO’s shipments increased about 28%. And despite Covid-related production declines, Tesla’s second-quarter deliveries are expected to rise about 30% year over year. NIO’s shipments are expected to grow closer to 10% in the second quarter.
(Tesla has delivered more than a million EVs in the last 12 months. NIO has delivered around 128,000.)
The message for Tesla investors is easy to see: focus on delivery growth. Wall Street expects Tesla to deliver about 1.4 million vehicles in 2022, up from 936,000 deliveries in 2021. Deliveries are expected to be about 2.1 million and 2.6 million in 2023 and 2024, respectively.
Tesla is expected to be able to produce about 2.5 million vehicles by 2024 from its existing manufacturing footprint, which includes plants in California, Texas and Germany, and China. What’s more, it took Tesla about two years from breaking ground on a plant to rolling cars off the assembly line. Investors should probably consider a new facility or significant expansion within the existing footprint by this time next year. When not on the road, Tesla stock could face an NIO-like problem.
The message for NIO investors is just as easy to see: Restart growth. NIO has expanded its capacity in 2022. It hopes to reach quarterly production capacity of 40,000 to 50,000 units in the second half of 2022. Supply chain issues could obscure this potential. If the NIO management can get through and let the numbers rise again, investors should react with relief.
Write to Al Root at firstname.lastname@example.org