The electric vehicle (EV) space continues to heat up as the transition towards clean energy solutions is accelerating. China is the largest EV market in the world and the country’s rising GDP rates coupled with an increase in the purchasing power of its middle class will be key drivers for vehicle demand in the upcoming decade.
Further, the Chinese government is also supporting this nascent but highly disruptive industry by providing subsidies and other incentives. This makes EV stocks such as NIO (NYSE:NIO) a top bet for long-term growth investors.
NIO is valued at a market cap of $54 billion
NIO is one of the largest players in the EV segment and is currently valued at a market cap of $54 billion. It designs, develops, manufactures, and sells smart EVs in Mainland China, Hong Kong, the U.S., U.K., and Germany. It is also involved in the provision of energy and service packages to users while offering power solutions.
Through its network of service centers, NIO provides repair, maintenance, and bodywork services. It also provides statutory and third-party liability insurance and vehicle damage insurance via third-party insurers.
NIO stock is down 47% from record highs
Shares of NIO have grossly underperformed the broader markets year to date. In fact, NIO stock is down 47% from record highs after it gained a staggering 1,100% in 2020. The recent pullback in share prices can be attributed to NIO’s steep valuation as well as rising competition in the electric vehicle space. However, it also provides investors with an opportunity to buy a quality growth stock at a lower valuation.
According to a research report from BloombergNEF, EV sales are forecast to touch 54 million units in 2040, up from 26 million in 2030 and just 1.7 million in 2020. Further, China is expected to account for 13 million EV sales in 2030 and this figure might climb to around 20 million in 2040.
In 2020, NIO sold 44,000 EVs indicating a year over year growth of 113% compared with 2019. In the first quarter of 2021, its EV sales were up by a massive 423% at more than 20,000 units and the company has produced over 100,000 units since inception.
NIO is expanding its suite of products and services. While it will launch multiple vehicle variants going forward, NIO is now offering battery-as-a-service which is a subscription service. This service will expand in China helping the company to gain market share, as charging infrastructure gains pace. It has also partnered with Ford (NYSE:F) where the latter’s Mach-3 owners will be able to use NIO’s charging infrastructure in China.
NIO is planning to expand into Europe by the end of 2021 which should accelerate top-line growth.
NIO trading at a steep valuation
Analysts tracking NIO expect the company to increase sales by 110% to $5.35 billion in 2021 and by 60% to $8.55 billion in 2022. This will allow NIO to narrow its losses from $0.73 per share in 2020 to $0.08 per share in 2021.
NIO stock is trading at a forward price to sales multiple of 10x which is steep. However, its valuation is supported by its attractive growth rates. Analysts have a 12-month average target price of $53.64 for NIO stock which is 50% above its current trading price.