It's been a November to remember for NIO (NYSE:NIO). The Chinese electric car maker just hit three big milestones in two days. On Nov. 2, its market cap surpassed that of German automaker BMW. The very next day, its market cap not only crossed the $50 billion mark, but also surpassed that of General Motors (NYSE:GM)

That's impressive, to be sure, but is it justified? Here's what investors need to know about NIO's potential and why it could be the next Tesla (NASDAQ:TSLA).

A man in aviator goggles holds a steering wheel astride a rocket.

Image source: Getty Images.

Growing fast

NIO has benefited from a lot of hype around the electric vehicle (EV) industry. Splashy stock market debuts from companies like Nikola (NASDAQ:NKLA) have generated a buying frenzy among EV investors. It's tempting to lump NIO into the same class as start-ups like Nikola and Lordstown Motors (NASDAQ:RIDE), but there are a few key differences.

NIO went public in late 2018, well before the current wave of electric car IPOs. Unlike Nikola and Lordstown, NIO is already producing electric vehicles. Taking a page from Tesla's playbook, NIO started with a sports car in 2016 and then quickly transitioned into specializing in electric SUVs, including 2017's full-size ES8, 2019's midsize ES6, and 2020's EC6 "coupe SUV," essentially a crossover SUV.

In October, NIO produced and delivered more than 5,000 vehicles in one month for the first time in its history, more than double its October 2019 output. Of course, that pales in comparison to the likes of General Motors, which sold more than 600,000 vehicles per month in 2019. Even the comparatively small-scale Tesla delivered more than 48,000 vehicles per month in Q3 2020. 

So, although NIO is currently growing by leaps and bounds, it has a long way to go to justify its current valuation.

The Tesla connection

Analysts have been questioning the lofty valuation of Tesla -- currently the world's largest automaker by market cap -- for years. While I'm wary of calling NIO "the next Tesla," the company certainly has some similarities with its larger U.S. rival that could bode well for its future.

Much like Tesla, NIO has chosen to focus on a handful of models. Tesla got its Model S sports coupe production up and running before it moved on to the Model X and eventually the Model 3.

NIO's financials also look similar to early stage Tesla's: Revenue is increasing at a rapid clip, and while the company's net income is still negative, it's showing gradual improvement. However, the company's debt load is also increasing quickly. It's worth remembering that Tesla didn't post consecutive quarterly profits until 2018, and its debt load finally peaked (at least for now) at about $13.4 billion at the beginning of this year. NIO investors should expect a long wait before the company achieves profitability.

All eyes on China

Thus far, Tesla -- via its Shanghai Gigafactory -- has dominated the Chinese electric vehicle market. However, it's reasonable to expect that the Chinese government will favor domestic EV manufacturers like NIO over foreign companies like Tesla. That could be NIO's secret ace in the hole.

The Chinese auto market is already the largest in the world, and its EV market alone is expected to be worth more than $800 billion by 2027. NIO buyers in China receive generous subsidies. So, while the base price of the company's EC6 is about 368,000 yuan (about $56,000), subsidies can reduce that to 280,000 yuan, or about $42,500. Meanwhile, the comparable Tesla Model Y sells for about 488,000 yuan (roughly $74,000), and isn't eligible for those subsidies due to its higher cost.  

General Motors' sales, though, currently dwarf both Tesla's and NIO's. GM sold more than 3 million vehicles in China in 2019. By contrast, Tesla is on track to sell about 150,000 Model 3s in China in 2020. Even with potential favorable treatment from the Chinese government, NIO has a lot of ground to make up here.

Hot or not?

NIO certainly has the potential to live up to its lofty valuation. It operates in an underserved niche in a rapidly expanding market where it has a home-court advantage. However, it's starting from scratch while its bigger and wealthier rivals are building on existing brand recognition and manufacturing expertise.

Ultimately, NIO is a promising but speculative player in the emerging electric vehicle market. Investors who can stomach the risk may want to take a chance on the company, but they should be aware that it will take time before the company can prove itself successful... if ever. 

Editor's note: This article has been corrected. NIO has four cars currently in-market: the ES8, the All-New ES8, the ES6, and the EC6. NIO has not disclosed its upcoming models of cars.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.