Is NIO Really Worth A $100 Billion Valuation?

Last week, NIO (NYSE: NIO) shares soared by more than 15% as investors eagerly awaited its annual NIO Day event that was held last Saturday. At time of writing, the company's market cap has reached an outstanding $97 billion, which is almost as much as Ford and General Motors combined. 

NIO's growth

No one can argue that NIO is growing extremely fast. The company's revenue is set to double to about $5 billion this year as deliveries are fulfilled quicker than ever. In addition, NIO also delivered 7,000 cars in December and 43,728 in 2020 overall. The company is benefiting greatly from China's low-cost manufacturing and ecosystem of battery and auto part suppliers. 

What's very important for investors to know about NIO is that its addressable market is expanding rapidly. China has a population of over 1.4 billion and the government has announced a new policy which states that 50% of all new vehicle sales must be "new-energy" units by 2035 and the other half must be hybrids, which will further stimulate NIO's growth. 

NIO has also been innovating in two key areas -- battery technology and self-driving software -- which has been a significant driving force behind its share price recently. However, battery production is not likely to make NIO stand out as its rivals can easily replicate this, especially as the country's EV policy encourages battery swapping. However, the company does have an edge in self-driving technology due to its quality of software, and the amount of data it holds to improve algorithms. 

NIO's high valuation 

NIO may be growing very fast, but its valuation is looking a little rich. Currently it is trading at 18x its consensus 2021 revenues, meaning that it is valued similarly to its competitor, Tesla. However, experts believe that Tesla is more deserving of such a valuation due to its stronger software and self-driving capabilities. NIO's growth rates might be higher than Tesla's, but this is due to its smaller size, and it is also a riskier investment due to the intense competition in the EV market in China where there are over 400 manufacturers.

NIO faces two main challenges: 

Firstly, Tesla is planning to launch its Model Y SUV which was made in China and will reportedly be  cheaper than NIO's SUV ES6. NIO will find it hard to compete with Tesla's brand image and software features. However, NIO's advantage here is that it is a home-grown company in China and the Chinese government is very wary of foreign companies like Tesla and will always favor local firms.

Secondly, competition in China is fierce in the EV space as the country accounts for over 50% of global EV deliveries. Xpeng is another relatively young Chinese electric vehicle manufacturer that has recently gained attention from investors. NIO's revenues are set to increase by 95% in 2021, whereas Xpeng's revenue is expected to grow by about 120%. Xpeng has the potential to capture investors looking to invest in a Chinese-owned EV maker with a slightly lower share price and the potential to outperform NIO's growth in 2021. However, NIO benefits from being around longer and has invested more in technology, making it essentially a safer bet for investors.

Is NIO stock overvalued? 

If we look at the future potential of the company, then NIO is still worth it. The company's valuation might be high, but investors are backing that NIO will continue to grow in China while eventually becoming a bigger player in the global EV market. 

Whilst the company still faces significant obstacles, NIO seems to have advantages in its corner. The biggest being its huge addressable market in China and its brand recognition as a luxury manufacturer which will help the company compete against its younger, less experienced rivals.

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