Should You Pick Nio Over Tesla?

by Trefis Team
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Electric vehicle stocks have had a solid year, as investors put a premium on growth stocks while betting that the disruption caused by Covid-19 could make the shift to EVs harder for mainstream automakers. While Tesla (NASDAQ:TSLA) stock has soared by about 5x this year, smaller players have benefited as well. China-based Luxury electric car maker Nio (NYSE: NIO) has seen its stock price soar by almost 6x year-to-date. How do Tesla and Nio compare? While both companies trade at a similar valuation, with a price-to-sales multiple of about 13.5x based on projected 2020 Revenue, Nio is growing more quickly, but Tesla might be the safer bet. Our analysis How Does Nio Compare With Tesla? has more underlying numbers, parts of which are summarized below.

Nio, which was founded in 2014, currently offers three premium electric SUVs, ES8, ES6, and EC6, which are priced starting at about $50k. Nio delivered close to 20.5k cars in 2019, marking an 81% year-over-year increase and we expect the number to grow by about 85% this year. In comparison, Tesla’s deliveries grew by 50% last year to 368k vehicles and we expect the number to rise by about 29% in 2020, driven by the launch of its Model Y and the opening of its Chinese factory. Nio is in the earlier phases of growth with revenue expanding 56% last year, with growth likely to pick up to over 90% in 2020. Tesla sales grew by just 15% last year and could potentially pick up to 30% in 2020.

Nio’s Net Margins remained deeply negative over 2019, at -146%, with Gross Margins also remaining in the red. Things are getting better as sales ramp-up, as Gross Margins jumped from -12.2% in Q1 2020 to about to 8.4% in Q2 2020 and Net Margins are also likely to improve significantly in the near-term.  Tesla, on the other hand, is expected to post Net Margins of over 5% this year, driven by improved deliveries, higher regulatory credit sales, and potentially higher software sales.

Tesla Is The Safer Bet

Overall, while Nio’s faster recent growth and unique innovations such as Battery as a Service (BaaS) – which allows customers to subscribe for car batteries, rather than paying for them upfront – are no doubt interesting, we think it remains a riskier investment compared to Tesla. Nio is focused on the Chinese EV market, which is extremely competitive, with several hundred players. Scaling up production quickly is also not going to be an easy task for Nio. The company has also faced quality challenges in the past – last year it recalled about 5,000 vehicles after reports of several fires – and it remains to be seen if it can scale up production while maintaining quality.

While Tesla stock also looks somewhat expensive, the company’s well-established and desirable brand, its industry-leading tech and software differentiation, and fast-improving profitability could offer a better margin of safety compared to Nio. Tesla’s business model looks compelling, and margins are poised to rise further driven by declining battery costs, improved self-driving capabilities – which could drive software sales, and better operating leverage.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 50% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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