Should You Pick This Chinese EV Player Over Tesla?

TSLA: Tesla logo

Over the last year, Nio, China’s fast-growing luxury electric vehicle maker, has seen its stock decline by almost 20%. In comparison, EV bellwether Tesla stock has roughly doubled, with its market cap crossing the $1 trillion mark. Tesla stock now trades at about 21x projected 2021 revenue, while Nio trades at a more reasonable 11x. Is this justified? How do the two companies compare in terms of delivery growth, revenues, margins, multiples? Our analysis How Does Nio Compare With Tesla? has the details, parts of which are summarized below.

Nio’s revenue growth rate has been superior to Tesla, given that it’s earlier in the growth cycle. Revenues grew by about 88% a year over the last two years, with sales likely to rise by about 120% this year to about $5.6 billion. Tesla’s sales have grown by about 28% each year over the last three years and they are likely to rise by about 60% to about $51 billion in 2021. Both companies have managed the ongoing chip shortage quite well, with Nio’s Deliveries likely to grow from about 43k units in 2020 to about 90,000 units in 2021, while Tesla’s deliveries could grow from 500,000 to about 850,000 units, per our estimates. EV companies typically have better unit economics compared to internal combustion engine players and this shows in both Tesla and Nio’s gross margins. However, Tesla does have the edge over Nio here, with its gross margins rising from around 21% in 2019 to over 28% over the first nine months of this year. Nio’s Vehicle Gross Margins rose from negative levels in 2019 to around 19% over the first nine months of this year.

So overall, Nio has clearly demonstrated stronger revenue and delivery growth, but Tesla has an edge in terms of margins. Does this justify Tesla’s valuation multiple being almost 2x Nio’s? Investors have been cautious about investing in Chinese stocks following the Chinese government’s big crackdown on the country’s technology industry and this has been a key factor weighing Nio stock down, despite the company’s relatively strong performance. Tesla stock, on the other side,  has seen momentum build given the increasingly positive regulatory environment for EVs and the company’s solid delivery growth. That said, we do think that Tesla stock is overvalued at current levels. See our analysis Tesla Valuation: Expensive or Cheap? for more details.

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[10/30/2020] Should You Pick Nio Over Tesla?

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 that’s beaten the market since the end of  2016.

Returns Nov 2021
MTD [1]
YTD [1]
Total [2]
NIO Return -1% -17% 535%
TSLA Return 6% 61% 2560%
S&P 500 Return 1% 24% 108%
Trefis MS Portfolio Return -2% 48% 301%

[1] Month-to-date and year-to-date as of 11/30/2021
[2] Cumulative total returns since 2017

See all Trefis Price Estimates and Download Trefis Data here