Stock of the Week: Nio

Andrew Willis: With Tesla choosing China as a major manufacturing hub, it might not come as a surprise that local competitors are making the most of the business environment there. We've recently initiated coverage of a few such companies, including Li Auto, Xiaopeng, and Nio, which is heading off against Tesla with a premium brand it's built in the Chinese market.

Nio is known for some high-performance EVs with a predominantly practical yet high-end lineup. Nio and peers were founded more than a decade after Tesla, but their products aren't necessarily followers in the EV space. Nio pioneered battery swap technology, for example, notes equity analyst Vincent Sun, and the company has a battery-as-a-service solution, which separates the battery pack from the vehicle and thus cuts up-front costs by 15% to 30%.

Another distinguishing factor for Nio and peers like Xiaopeng is speed. Yes, Tesla can pump out 80,000 cars in a month in Shanghai, but can it go from announcement to delivery in the same quarter as Nio did with its latest SUV? By using contract manufacturing with established factories in China, Nio can be very nimble. Given Nio's relative size, we see significant growth potential and more than 50% compound annual revenue growth until 2024, with yearly deliveries reaching 400,000 by 2025, around the same time, the company should be breaking even. That should also be a mere 5% market share in China EV space, which gives you an idea of the growth runway ahead. Currently, the stock is trading at a discount with a 4-star rating. But with no moat, while we wait to see brand loyalty that can last at least a decade as customers wait for production to ramp up.

For Morningstar, I'm Andrew Willis.

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