- Wall Street's favorite EV stocks are in steep correction territory, and Nio has lost 45% of its market cap in the past month.
- Projecting 2021 sales, the company may be close to attractive entry levels. I recommend cash secured put options to be able to buy Nio at a reasonable valuation.
- Nio's execution remains strong with growing production capacity and expanding battery swap network; global chip shortage can cause short-term disruptions.
Chinese electric vehicle manufacturer NIO (Nio) (NYSE:NIO) stock has had quite a run in the past 52 weeks, with 970% appreciation in value. The EV segment has been a Wall Street favorite and is facing aggressive sell-off in recent weeks. With EV adoption at its infancy, I believe the company remains in very early stages of growth and that its growth fundamentals are strong.
NIO stock is down almost 45% from its all-time-high price and is approaching attractive entry points.
Discussing the Valuation
I wrote my first article on the company Nio: Expensive But Plenty Of Growth Ahead a few weeks after I initiated a position in the company. At the time, the company was trading at a 13x sales valuation. I typically don't pay more than 10x sales for a company, no matter how strong the growth story is. At the same time, I am comfortable paying up to 10x sales only if the company's YoY sales growth is close to 40% (my own variation of the rule of 40).
Source: Seeking Alpha
While I believe that the valuation remains stretched, I think it can be justified through the company's growth.
Looking into the company's sales figures, Nio sold 43,728 vehicles in 2020, a 112% increase over the previous year (20,565 vehicles). Total revenue grew 107% YoY and the company projects Q1 2021 vehicle deliveries between 20,000 and 20,500 and quarterly revenue between RMB 7,382.3 million ($1.13 billion) and RMB 7,557.2 million ($1.16 billion).
Nio has already sold 12,803 vehicles in the first two months of 2020 and remains on track to achieve these forecasts.
Extrapolating the Q1 performance to the full year (I believe that is conservative since Nio sales are typically higher in the second half of the year), I am able to forecast annual sales of RMB 29,878 million ($4.58 Billion), an 84% increase from 2020.
Source: Author's calculations
A Few Options to Consider
I am looking to add more to my Nio position at the right valuation, and am considering cash secured put options for the same.
Put options for June 18, 2021, are yielding approximately 9.7% ($25 strike) and 14% ($30 strike), providing a possible entry point close to $22.5 and $25.5, respectively.
Further out, put options for August 20, 2021, are yielding 14% ($25 strike) and 19% ($30 strike), providing a possible entry point close to $21.5 and $24.5, respectively.
In my opinion, these options would enable long-term investors to make attempts to initiate a position or add to their existing positions at relatively comfortable valuations.
Global chip shortage is causing major automotive companies like General Motors (GM) and Ford (F) to cut their production. According to research by IHS Markit, the auto industry is expected to manufacture 672,000 fewer vehicles in Q1 2021. As such, Nio announced that it will be cutting production to 7,500 vehicles a month.
I believe my projected sales for 2021 are conservative to accommodate for these production constraints. Nevertheless, the company is a hot stock at this time and small bad news can cause significant volatility.
In my first article on Nio, negative gross margins were pointed out as a concern. However, the company managed to turn this around in the second half of the year and reported 12.9% and 17.2% gross margins in Q3 and Q4, respectively, ending the year with an annual gross margin of 11.5%.
Gross profit margin continues to be below that of Tesla (TSLA) which reported 21% annual gross margin. It is important to note that Tesla has an advantage of increased profitability through the sale of regulatory credits, as noted by ALT Perspective in their article "NIO Vs. Tesla: Which Is The Better Investment Today".
Since my early August article, Nio has sold almost 157 million shares through equity offerings, raising close to $4.2 billion. (source 1 & 2) As a result of sale of stock, the company has been able to maintain a relatively healthy balance sheet, with almost $6.5 billion in cash and short term investments, approximately $1.4 billion in debt (ST and LT). While shareholder valuation can be dangerous, it makes sense for the company to use the clearly inflated stock prices to raise cash for their growth.
Nio doesn't manufacture its own vehicles, but uses the state owned JAC motors for this purpose. During the conference call, management announced efforts to increase the production capacity in the JAC Hefei plant to 150,000 units under one shift and 300,000 units under two shifts to prepare for the production of ET7 and other future models.
Source: Nio Website
Tesla spent years and billions to expand its supercharger network in the United States. Nio is investing in battery swap centers, where vehicle owners can replace their empty batteries with a fully charged battery in under 3 minutes. The company's battery-as-a-service concept allows customers to purchase a Nio model without the battery, at a lower price, while subscribing to this service. The battery swap technology is strongly backed by the Chinese government due to its benefit in broader applications for the country such as buses, street sweepers and other logistics vehicles. There is additional background about Nio and the BaaS opportunity in my previous article - BaaS is a big reason to buy Nio. Nio has partnered with a China state owned electricity distributor to build 100 battery swap stations across China.
I believe Nio is making investments in the right areas to scale manufacturing, production volumes and expand its moat with the network of battery swap stations. These are instrumental for sustained growth in adoption of Nio vehicles.
Nio is exhibiting clear signs of a successful growth story. While global chip shortage is potentially limiting the company's production at this time, I believe the company's 2021 sales would meet or exceed my forecasted levels.
The 45% correction in the stock price is making the company's valuation approach attractive levels. If options are something you consider in your investment strategy, I recommend cash secured puts to be able to buy Nio at under 10x projected 2021 sales. If the option expires worthless, investors would still benefit from a very significant 10-20% return on their investment in a 3-5 month period. If assigned, it would be a great long-term growth opportunity.
This article was written by
Analyst’s Disclosure: I am/we are long NIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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