Where Will NIO Stock Be In 10 Years?

Summary

• NIO continues to materialize on its ambitions of becoming an industry leader with ongoing overseas expansion, increasing domestic market share, and new EV models accompanied by enhanced technology.
• In addition to the brand new ET7 sedan, NIO will also be launching two additional new EV models in 2022 to further diversify its product mix and achieve higher sales.
• And to increase mass market penetration, NIO will be launching a separate brand that offers lower priced EVs.
• The company's overseas expansion plans are executing according to plan as well, with its Norway debut slated for September. NIO has also recently announced a global battery swap station deployment plan, with more than 1,000 swapping stations to be installed outside of China.
• Combined with accelerating global EV adoption encouraged by government policy intervention and attractive financial incentives, NIO is slated to become Tesla's closest global competitor before the end of the decade.

Andy Feng/iStock Editorial via Getty Images

NIO's (NYSE: NYSE:NIO) second quarter losses continued to narrow as a result of strong vehicle sales and lowered material costs, while rivals warned of further pressure on margins ahead due to the ongoing global chip supply shortage and rising raw material prices. The Chinese electric vehicle ("EV") maker delivered close to 22,000 vehicles during the second quarter, which drove vehicles sales up by more than double from a year ago to RMB 7.9 billion ($1.2 billion). Including other revenues generated from the sale of additional services, which were also up by more than 130% in line with incremental vehicle sales, total revenues for the quarter reached RMB 8.4 billion ($1.30 billion), surpassing consensus estimates of RMB 8.29 billion ($1.28 billion). NIO has also made significant progress in growing its market share in China, representing more than 50% of the nation's electric SUV sales within its price segment; market penetration in China's Tier 1 and Tier 2 cities was the highest for the premium EV brand, with 14% in Shanghai alone during the first half of 2021. Looking ahead, NIO expects to sell 23,000 to 25,000 vehicles in the third quarter, representing projected sales of RMB 8.91 billion ($1.4 billion) to RMB 9.63 billion ($1.5 billion).

NIO had also dropped a couple of bombshells on Wednesday's earnings call, including the launch of two new EV models in addition to the ET7 in 2022, and a separate brand that offers more affordable pricing to increase penetration into the mass market. The three brand new EV models, including the ET7 sedan, dropping in 2022 will include one that will become NIO's lowest-priced offering. Meanwhile, the separate brand will accompany NIO to form a duo that imitates Audi (OTC:AUDVF) and Volkswagen (OTCPK:VWAGY), offering lower-priced EVs that will compete for market share in the price segment of Tesla's (TSLA) Model Y/3, while providing "much better service". Management did not provide any further detail regarding launch timelines and pricing information on the new brand, but the news can be viewed as a strategic move for the rising EV maker, which is looking to build presence in China's smaller "Tier 3 cities" and further expand its market share in the world's largest EV market.

Considering the rapidly expanding global EV industry made possible by government policy intervention and financial incentives, combined with the aforementioned growth initiatives in addition to its ongoing overseas expansion efforts, global roll-out of NIO Power battery swapping stations, and in-house development of autonomous driving technology, NIO is slated to become Tesla's closest competitor before the end of the decade. Consistent with our coverage initiated in the first quarter, we remain bullish on the stock and expect share price appreciations of more than 35% in the near term and exceeding $100 in the long run.

Government Intervention Snapshots

With the transportation sector currently contributing to one of the largest portions of global greenhouse gas ("GHG") emissions, accelerating global EV adoption has become a priority on the political agenda to ensure aggressive emissions reduction targets set to combat climate change are met. In addition to tightening emissions standards on new vehicles and offering attractive financial incentives in the form of monetary subsidies to buyers, global governments have also allocated billions of dollars in capital towards building out the EV economy in recent years to accelerate the transition to emissions-free transportation. The combination of government policy support is expected to boost global EV sales from 3.1 million in 2020 towards 14 million by 2025 and up to 145 million by the end of the decade, representing significant additional growth opportunities for EV makers like NIO, with its presence diversified across different geographic regions, price segments, and vehicle segments.

China

China's roadmap on EV adoption is a critical piece to its national goal of becoming carbon neutral by 2060. The country currently dominates the global EV market, with more than 1.3 million EVs sold in 2020 alone. Seeing how its tightened fuel economy regulations and financial incentives have effectively increased the country's EV adoption in recent years, the Chinese government has delayed phasing out its subsidies on EV sales from 2020 to 2022 to ensure its goal of having EVs account for more than 20% of total new car sales by 2025 is met.

The subsidy currently offers a discount of up to RMB 13,000 ($2,000) for eligible EV purchases, including those that are priced under RMB 300,000 ($46,000) and/or compatible with battery-swapping technology. As the only EV maker with models compatible with battery-swapping technology, NIO continues to be a significant beneficiary from the Chinese government's EV purchase subsidy program. The EV maker's recent strategic partnership with Sinopec, the state-backed oil giant, to deploy an additional 5,000 battery charging and swapping stations over the next five years, and cooperate in the development of new materials and smart EV technology further bolsters the support it is receiving from the Chinese government to facilitate continued growth within the domestic Chinese EV market. And NIO's upcoming roll-out of lower-priced models through the new brand to attract additional sales in the mass market is expected to further benefit from tailwinds arising from the Chinese government's policy support towards making EVs the mainstream choice by 2035, which will continue to boost the EV maker's overall valuation in the long-run.

Europe

Europe is another dominant EV market, with Norway currently leading the way to mass-market adoption. The pact's recent tightening of emissions standards, which ultimately phases out ICE sales altogether by 2035, is expected to further accelerate mass-market adoption of EVs across the broader European markets like France and Germany in coming years. The European Commission is also contemplating the requirement to have member states install electric charging points every 37 miles on major highways to support the ongoing build-out of Europe's EV economy.

The ambitious emissions reduction targets and strategies to bolster EV adoption implemented by the European Union in recent months makes a strong foundation for NIO's upcoming entry to the European EV market. With the first batch of its flagship SUV, the ES8, ready for preorder and delivery to the Norwegian market in September, and a comprehensive system of supporting infrastructure, including NIO Houses, service centres, and battery-swapping stations ready for roll-out across the region, NIO is well-poised for becoming a critical contributor to the transition towards clean mobility in the second-largest EV market in the world. To further build out its presence in the European EV market, NIO has recently hired a new CEO to lead NIO's European operations, and is currently planning further expansion into other regions including Germany and Amsterdam to capitalize on the growing opportunities made available by Europe's ten-year decarbonization roadmap.

U.S.

NIO's global ambitions also include ultimate entry into the U.S. market after Europe. Although this has not been explicitly included in any of NIO's publicly confirmed ambitions for the next five years, a recent interview by NIO's founder and CEO, William Li, indicates that the company is continuously making progress towards further overseas expansion, including the U.S., which could materialize within the ten-year horizon.

Recently announced policies by the Biden administration, including an aggressive plan to have EVs account for 50% of total new car sales by 2030 and an allocation of $7.5 billion under the new trillion-dollar infrastructure bill towards building out charging stations across the country, indicate that the U.S. EV market, which currently lags behind its Chinese and European peers, is slated to pick up in the latter half of the decade. Preliminary estimates show that U.S. EV sales could grow at a compounded annual growth rate ("CAGR") of up to 30% towards a total of 18 million EVs on American roads by the end of the decade, representing approximately 14% of projected global EV sales. The estimated timeline for NIO's entry into the U.S. after growing its presence in Europe could coincide with the American EV market's prime time, thus promising a steeper ascend in global sales for the EV maker.

Source: Author, with data from our internal financial projections (NIO_-_Forecasted_Financial_Information.pdf).

Based on NIO's global ambitions, and strategic business model to maximize market share across different price and vehicle segments, combined with its performance reported to date, our base case forecast projects vehicle sales of RMB 32.6 billion ($5.0 billion) by the end of the year, with growth at a CAGR of 30.4% towards RMB 461.4 billion ($71.2 billion) by the end of the decade.

Leading by Innovation

In addition to global expansion of the current NIO brand and the upcoming introduction of a lower-priced new brand to maximize mass market penetration, NIO's innovative technology is a prime competitive advantage that will help the Chinese EV maker become a global leader in the EV sector. NIO has remained committed to developing its proprietary advanced driving assistance system ("ADAS") and autonomous driving technology since day one. To date, the EV maker boasts one of the largest autonomous driving development programs, with a team of more than 500 engineers and growing, and multiple strategic partnerships with those engaged in the autonomous driving supply chain, including advanced driver-assistance systems developer Mobileye and LiDAR system developer Innovusion.

The newly introduced NIO Pilot feature, which is currently priced at RMB 39,000 ($6,000) on top of vehicle pricing, has also increased intake rate to 80% since its launch about a year ago, indicating robust demand for NIO's ADAS technology. The ET7 sedan, which commences delivery in 2022, will also be equipped with NIO's newest autonomous driving technology, "NIO Autonomous Driving" or "NAD". NAD will be offered through a monthly subscription like its current battery subscription service for RMB 680 ($105) per month, and enable drivers with a safe and comfortable autonomous driving experience. With the global autonomous vehicle market demand forecasted to grow at a CAGR of more than 35% towards the end of the decade, NIO's investments into developing its own autonomous driving technology are expected to pay significant dividends in the long run. Not only are the revenues generated from subscription fees charged on its autonomous driving and advanced driving assistance features expected to accelerate steeply over the ten-year forecasted period, but the offering is also expected to further boost its global vehicle sales as demand for self-driving technology continues to pent up in the long-run.

NIO's exclusive "Battery as a Service" ("BaaS") subscription service, which enables NIO owners with flexible options for battery upgrades based on personal needs through its battery-swapping technology, is another exclusive feature offered by NIO. As discussed in detail in our previous coverage, BaaS is currently priced at RMB 980 ($150) per month and offers buyers an upfront discount of up to RMB 70,000 ($10,800) off of the car purchase price; users can change their subscription on a month-to-month basis between the standard 75 kWh battery pack and the 100 kWh battery pack based on personal needs. With the global EV battery swapping market projected to grow at a CAGR of 24.4% towards a value of $852.6 million by 2030, and NIO currently leading global deployment of the technology, the EV maker holds an invaluable first-mover advantage.

Our base case forecast projects revenues of RMB 2.3 billion ($352.1 million) generated from NIO's subscription-based model for its autonomous driving and battery swapping features by the end of the year, with growth at a CAGR of 30.0% towards RMB 31.5 billion ($4.9 billion) by the end of the decade. The growth assumption takes into consideration the market trends discussed above, as well as NIO's projected vehicle sales over the forecasted period given its global ambitions.

Source: Author, with data from our internal financial projections.

Fast-Expanding Margins

NIO's outsourced production strategy has hampered its gross profit margins in recent years, keeping it at bay under 20%, compared to up to 25% realized across peers with internalized productions. However, that narrative is about to change, as NIO adds margin expansion to its long-term business plan. Through the introduction of NIO Technology platform 2.0 ("NT 2.0"), a brand-new higher-margin technology platform for its new vehicles starting with the ET7, as well as the build-out of new plants, NIO aims to achieve a vehicle gross margin of 25% in the long-run, which puts it in a competitive range compared to industry peers. NIO's accelerated research and development ("R&D") timeline also enables it to increase its product mix offered to users, leading to higher sales while achieving scale in productions to drive down overall production costs.

Our base case forecast projects RMB 28.5 billion ($4.4 billion) in total costs of vehicle and other sales by the end of the year, generating a gross profit margin of approximately 18% based on its current cost structure with productions continued to be outsourced to JAC through the NIO-JAC joint venture, which extends to 2024. With the higher-margin NT 2.0 platform expected for deployment in 2022, offset by higher depreciation costs resulting from the shortened useful life of its predecessor, NIO Technology platform 1.0, gross profit margins are expected to improve towards 20% between 2022 and 2024, and further climb towards 22% by 2025 as NIO migrates to an integrated production strategy in-house. And with productions approaching scale, underpinned by increasing vehicle sales as projected in earlier sections of the analysis, gross margins are expected to reach 24% by 2026 and continue expanding towards 25% near the end of the decade.

Source: Author, with data from our internal financial projections.

Overall Financial Prospects

Considering the foregoing analysis on NIO's business outlook, the EV maker is expected to generate total revenues of RMB 34.8 billion ($5.4 billion) by the end of the year, with growth at a CAGR of 30.3% towards RMB 492.9 billion ($76.1 billion) by 2030. And related costs of sales are forecasted to land at RMB 28.5 billion ($4.4 billion) by the end of the year, with growth at a CAGR of 29.2% towards RMB 370.9 billion ($57.2 billion) by the end of the decade; the growth assumption on cost of sales is expected to be lower than that applied on projecting total revenues, which is consistent with our foregoing analysis that NIO's gross profit margin will ultimately expand towards 25% in the long-run through technological advances, internalized productions, and scale.

Source: Author, with data from our internal financial projections.

Meanwhile, total operating expenses, which include R&D and selling, general and administrative ("SG&A") spending, are expected to land in the high range through to 2025 to support NIO's ongoing development of new technology and EV models, and continued overseas expansion efforts. Specifically, R&D expenses are projected to remain elevated at up to 15% of total revenues through to 2025 to reflect the increasing headcount and development costs as NIO continues to roll out new and improved EV models and technology; related spending is expected to scale back and stabilize from 2026 onwards at approximately 8% of total revenues as the business continues to scale. SG&A expenses are also expected to remain in the high range and represent up to 17% of total revenues through to 2025 to support NIO's ongoing overseas expansion efforts, which include increased headcount, marketing activities, professional service fees; related expenses are expected to taper from 2026 onwards towards a level consistent with the average observed across revenue-generating automakers in the industry.

Source: Author, with data from our internal financial projections.

Combined with other nominal expenses related to financing and other ancillary activities, our base case forecast projects net losses to further narrow towards 2024, with nominal profits of RMB 8.2 billion ($1.3 billion) starting in 2025. The bottom line is forecasted to trend towards RMB 39.3 billion ($6.1 billion) by the end of the decade, representing growth at a CAGR of 36.8%.

Source: Author, with data from our internal financial projections.

i. Base Case Financial Projects:

Source: Author, with data from our internal financial projections.

Valuation

Source: Author, with data from our internal valuation analysis.

Our 12-month price target for NIO is $59.74 based on an equity value of $97.97 billion, which represents an upside potential of more than 40% based on the last traded share price of $42.47 on August 13th. And our long-term price target for the EV maker based on full realization of its ten-year growth trajectory is $115.43 based on an equity value of $189.3 billion.

The 12-month price target is derived from a discounted cash flow ("DCF") analysis over a five-year discrete period in conjunction with the financial projections for NIO as discussed in earlier sections. We have used projected free cash flows up to 2025 to compute our 12-month price target to reflect the valuation expectations on the EV maker's near-term growth initiatives. A cost of equity of 11.9% is applied to discount NIO's projected free cash flows in our near-term valuation analysis, which is consistent with the company's current risk profile, with a highly leveraged balance sheet and recent volatility in its price performance given uncertainties over the Chinese regulatory landscape. Our analysis also assumes a 90.6x EV/EBITDA multiple, which is derived based on NIO's current size of operations, growth initiatives, and business outlook. This compares to the EV/EBITDA range of 70.9x to 112.2x observed across its industry peers.

i. Near-Term Valuation Analysis:

Source: Author, with data from our internal valuation analysis.

ii. Sensitivity Analysis

Source: Author, with data from our internal valuation analysis.

Meanwhile, our long-term valuation for NIO is derived from a DCF on projected free cash flows over the ten-year forecasted period as analyzed in earlier sections. We have used projected free cash flows up to 2030 to compute our long-term price target for NIO to reflect its estimated intrinsic value upon materialization of its ten-year growth trajectory, which includes global operations, deployment of exclusive battery swapping and autonomous driving technologies worldwide, and profit realization. A lower WACC of 8.5% is used to discount NIO's long-term free cash flows to reflect an improved capital structure closer to the average observed across mature industry peers, as well as lower volatility as the business stabilizes in the long run. Accordingly, an EV/EBITDA multiple on the lower industry range of 70.9x is applied to the long-term valuation analysis to reflect the anticipated deceleration in growth for the years following the forecasted period as the company is expected to transition from an aggressive growth phase towards a stabilized business model.

i. Long-Term Valuation Analysis:

Source: Author, with data from our internal valuation analysis.

ii. Sensitivity Analysis:

Source: Author, with data from our internal valuation analysis.

Imminent Business Risks and Challenges

China's ongoing regulatory crackdown remains a top concern amongst existing and potential investors of NIO. Coupled with the "Holding Foreign Companies Accountable Act" signed into effect by the Trump Administration in December, which could delist Chinese companies that do not comply with SEC-mandated audit inspection requests within three years, NIO's share price has taken a slight hit in recent weeks as investors start to price in the new reality on the regulatory landscape of U.S.-listed Chinese stocks. However, Chinese EV stocks like NIO might just be one of the rare finds that could be spared from the ongoing regulatory clampdowns. The Chinese EV sector has seen a "greater tolerance for higher valuations" amidst the ongoing sell-off of Chinese stocks, partially due to it being a critical area of growth in China's political agenda. With a national goal to become carbon neutral by 2060, the Chinese government has been nothing but supportive to the domestic EV sector through policy intervention and financial incentives, which sets it apart from the riskier internet sector. It is also etched within China's official five-year State Development Plan for the New Energy Automobile Industry to have EVs account for 20% of total vehicle sales by 2025, and become the mainstream choice by 2035 to ensure China's continued dominance in the global EV market, which further safeguards those within the sector from significant adverse impact.

The ongoing global semiconductor shortage is another imminent business challenge for automakers worldwide. The anticipated timeline for the supply chain bottleneck to restore its balance, which is currently expected for mid-2022, could be further delayed given the global resurgence of the coronavirus delta variant and extreme weather conditions across major Chinese cities. NIO, which has experienced the impact first-hand in March with temporary facility shutdowns to adjust production volumes, acknowledged the ongoing supply volatilities during its recent earnings call and stated it will continue to work with supply chain partners to ensure smooth production and delivery in the coming quarters. NIO's strategic partnerships and investments into computer chip and system developers like Mobileye and Innovusion are also expected to offset some of the near-term impacts of the ongoing chip supply shortage by paying for some upfront.

Conclusion

NIO is expected to see substantial growth over the ten-year horizon. The EV maker's global ambitions combined with its portfolio of proprietary technological developments, which continue to play a critical role in facilitating global EV adoption, are bound to pay significant dividends in the long run when materialized. Our long-term outlook on NIO remains bullish as it continues to perform in line with our coverage and deliver value in the impending age of green transition and automation.

Disclosure: I/we have a beneficial long position in the shares of NIO either through stock ownership, options, or other derivatives. 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.