From mid-May 2020 to mid-October, shares of Chinese electric vehicle-maker NIO Limited (NIO) have run up more than seven times in price — 733% to be precise. Recognizing his error in not recommending the stock earlier, JPMorgan’s Head of Asia Auto Research Nick Lai issued a mea culpa this week: “Admittedly, we missed the stock’s major rally YTD.”
But better late than never.
Even if Lai missed the last 733 percentage points worth of gains, he thinks there’s still time for investors to catch the next 44% profit, and for this reason, Lai has upgraded NIO shares to “overweight” with a $40 price target. (To watch Lai’s track record, click here)
Why does Lai think there are still gains to be had here? In a nutshell, because the Chinese car market is changing. What is going on today, explains the analyst, is similar to “the transition from feature phone to smartphone over 2007-2014.” An entire type of product — cars powered by internal combustion engines — is being made obsolete and replaced by a new type of product: “new energy vehicles” (NEVs, include both fully electric cars and plug-in hybrids).
Chinese car-buyers are adopting these new electric vehicles in droves. And adding electric fuel to the fire, Lai argues that as EV car prices reach “parity” with the cost of gasoline-powered automobiles (around about 2022 or 2023), the initial wave of EV purchasing by businesses will be supplemented by consumers stepping up to buy electrics as their personal vehicles — sustaining the sales momentum for years to come.
Currently, about 5% of the Chinese automobile market (21.4 million cars sold in 2019 — 25% more than in the U.S.) is electric. But the analyst projects that this market share will quadruple or even quintuple by 2025, to as many as 20% or even 25% of all cars sold in the Middle Kingdom. Annualized, that would work out to a compound annual growth rate in sales of 41% through 2025.
Now, what does all of this mean for NIO stock in particular?
NIO is one of China’s four biggest electric vehicle makers. It currently boasts two electric SUVs for sale, the ES8 and ES6, recently introduced its EC6 crossover electric vehicle, and is expected to unveil a new electric sedan in December. According to Lai, at its current rate of growth, NIO will be capturing as much as 30% of all “premium passenger” EVs by 2025, and about 7% of total EV sales, making it “a long term winner in the premium space among Chinese brands.”
Extrapolating a sales number from that size market share, the analyst argues NIO could currently be worth about 3x fiscal 2025 sales — a sizeable discount to Tesla’s current valuation of more than 5x fiscal 2025 estimated sales. On the face of it, that sounds reasonable… if, that is to say, you take it as a given that Tesla stock is not vastly overpriced already.
It’s also worth pointing out that industry giants Ford and General Motors, both of which are gearing up sizeable EV operations of their own, currently sell for just 0.2x and 0.4x trailing-12-month sales — i.e. sales that these companies have actually already made, and not sales that they might or might not eventually make five years from now.
Viewed from that perspective, JPMorgan’s valuation of NIO at 3x FY 2025 sales seems a bit optimistic.
Overall, NIO holds a Moderate Buy rating from the analyst consensus, based on 7 “buy,” 2 “hold,” and 1 “sell” ratings. However, with shares trading at $28.48, the average price target of $21.72 implies a 24% downside. (To see NIO stock analysis on TipRanks, click here)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.