Nio Stock: A Cheap Alternative to Tesla?

Nio is a leading electric vehicle manufacturer in China and has successfully established a premium brand. It also pioneered battery swap technology as a supplement to charging. The launch of the battery-as-a-service solution separates the battery pack from the vehicle, which cuts the up-front purchase cost by 15%-30%. The company aims to build more than 4,000 swap stations worldwide by 2025, about 1,000 of which will be outside China. We expect rapid EV adoption in China, stimulated in part by a regulatory push and improving charging infrastructure; by 2025, we expect passenger electric vehicles to account for more than 30% of total passenger car sales.

Key Morningstar Metrics for Nio Stock

• Fair Value Estimate: $27
• Star Rating: 4 Stars
• Economic Moat Rating: None
• Moat Trend Rating: Stable

Economic Moat Rating

While we applaud Nio’s success so far in establishing a premium brand in China, we think it is too early to determine whether brand loyalty will be maintained over at least a 10-year period. As such, we think Nio has no economic moat. Generally, we see two moat sources in the auto sector: from intangible assets such as brand equity, best exemplified by Ferrari, and from cost advantage. We do not yet see either moat source for Nio, given our expectation for intensifying competition within the next 10 years.

Read more about Nio’s moat rating.

Fair Value Estimate for Nio Stock

Our $27 fair value estimate is based on our expectation that Nio will continue to gain market share from legacy automakers. As the company rides the industry electrification trend and increasing consumer adoption for new energy vehicles, we anticipate rising demand for its models and improving profitability on economies of scale over the next few years. Our fair value estimate implies a forward 2023 price/sales ratio of 3.0 times.

Read more about Nio’s fair value estimate.

Risk and Uncertainty

Our Morningstar Uncertainty Rating is Very High for Nio because the company operates in a cyclical, capital-intense, and highly competitive auto manufacturing industry. These factors combined can drive huge swings in return on invested capital, even for pure-play EV automakers. Heavy fixed costs induce fluctuating profitability from relatively small changes in demand, or from lost production due to supply shocks.

Read more about Nio’s risk and uncertainty.

Bulls Say

• Nio has built a premium brand image, which will differentiate it from mass-market competitors and generate extra pricing power for its electric cars.
• Advancing battery technology and charging solutions will ease range anxiety for EV drivers. Chinese consumers’ soaring demand for EV cars will benefit carmakers like Nio.
• Younger-generation car buyers value the vehicle technology experience, giving Nio leadership compared with legacy carmakers.

Bears Say

• Escalating battery costs in the past year will put Nio’s vehicle margins under pressure. This could derail the industry projection of EVs’ cost parity with internal combustion engines, affecting EV adoption in the long run.
• Rising competition in the EV market indicates that legacy automakers will defend their share with aggressive new model launches.
• Nio’s plan to launch a new mass-market brand could impair its premium image and dilute its focus on the premium EV segment.

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