It's been an amazing year for electric-vehicle stocks, as a new generation of start-ups has joined Tesla in capturing the imagination of investors.
NIO is an exciting company, but it's fair to say a lot of that enthusiasm is already priced into the shares. NIO currently trade at about 20 times expected sales over the next 12 months.
Given that valuation, it might be best to focus attention on other options right now. Here's why we think Li Auto (LI 0.84%), General Motors (GM 0.70%), and Hyliion Holdings (HYLN 1.32%) are better buys today.
Li Auto Is Carving Out a Profitable Niche
Lou Whiteman (Li Auto): Li Auto is attempting to carve out a profitable niche in the Chinese auto market. Early indications are it is succeeding.
Li Auto makes premium electric SUVs, with one vehicle on the road right now. That vehicle, the Li One, appears to be selling well, and the company has four other SUV models it plans to add to its portfolio in the years to come.
Li is focused on what it says is the fastest growing segment of the automotive market, and is attempting to differentiate itself via features including an onboard gasoline generator that supplements the battery and acts as a range extender. That can be an important selling point in China, where EV sales are booming but charging infrastructure, especially outside of large urban areas, is lagging behind sales growth.
The company also has a management team that is familiar with the workings of U.S. public markets. Li's founder and CEO, Li Xiang, brought his last start-up to Wall Street, and as owner of 21% of Li Auto's shares his interests are closely aligned to those of shareholders.
Like NIO, Li Auto is not an inexpensive stock. The company trades today at about 14 times the amount of revenue it expects to generate over the next 12 months. But Li Auto has the potential to grow into that valuation quickly.
Li Auto expects to sell about 30,000 vehicles this year, but Goldman Sachs analyst Fei Fang says it has the infrastructure in place to manufacture up to about 500,000 annually without much added construction cost. The analyst expects the company to get to that sales number by 2025.
NIO's bigger (for now), but GM's better
Rich Smith (General Motors): A funny thing happened on the way to Dow 30,000. On Nov. 5, 2020, NIO for the first time ever surpassed General Motors in market capitalization. In the days since, the two stocks have traded places a few times, but as of market-close on Wednesday, NIO's market capitalization of $65.4 billion still outweighs GM's market cap of $63.8 billion.
That's just crazy.
Two years ago, NIO didn't even crack the $1 billion annual sales threshold, clocking in at just $720 million in products sold in 2018. Two years later, NIO's sales are already twice that, and analysts expect NIO to close out this year at $2.4 billion in sales -- a three-fold increase in just two years.
But even so -- $2.4 billion is a tiny fraction of the $121 billion in sales GM is expected to make this year. And NIO's growth rate, while impressive today, is going to slow over time as the company becomes subject to the law of big numbers. It might even start slowing before its numbers get big, as GM begins beating NIO and other electric car makers at their own game.
Consider: Last year NIO spent $628 million on research and development of its supposedly futuristic electric cars. That's a lot. But GM spent $6.8 billion -- 10 times as much. This suggests that the cars GM is building are probably getting better much, much faster than are NIO's cars.
Moreover, GM's spending isn't slowing down. On top of research into traditional gas-powered cars, last month, GM promised to invest $27 billion into EV development, specifically, over the next five years. In contrast, NIO has already cut its own research and development budget roughly in half. Through the first nine months of 2020, the company put only $240 million into R&D (according to data from S&P Global Market Intelligence).
Long story short, there's a reason GM has the best-selling EV in China already. And there are even more reasons to prefer GM stock over NIO.
This company found a smarter way to electrify heavy trucks
John Rosevear (Hyliion): Regular readers know that I'm a NIO fan, but it's true that the Chinese automaker's stock is looking kind of pricey right now. Hyliion is another company in the electric-vehicle space that has impressed me quite a bit -- and its stock is still in reasonable price territory.
Hyliion is entering the same space as Nikola -- electrified heavy trucks -- but in a completely different way. Instead of trying to build electric trucks from scratch in its own expensive factory, Hyliion is designing hybrid and electric drivetrains that can be installed in existing semis from any of the major heavy-truck makers -- and having them built by an established truck supplier.
The magic here is that rather than trying to "disrupt" a conservative industry, Hyliion is bringing a disruptive product to market with a business model that already exists in the heavy-truck world, and with partners who are familiar names to big truck-fleet operators. Hyliion's drivetrains are manufactured by heavyweight auto supplier Dana and shipped by Dana directly to truck manufacturers (for installation in new trucks) or to "upfitters" who can retrofit them to a fleet's existing trucks.
Hyliion's first product, shipping now, is a system that converts a diesel-powered semi to a diesel-electric hybrid. The second, coming soon, is a complete electric powertrain system called "Hypertruck ERX." As initially designed, Hypertruck ERX includes a "range extender," a natural-gas-powered generator that recharges the truck's batteries while under way, but it can also be used with a hydrogen fuel cell for complete zero-emissions operation.
Hyliion is led by founder Thomas Healy, a Carnegie Mellon-trained engineer who is an eloquent spokesperson for the technology and the opportunity. Healy has assembled a team of industry veterans, raised more than enough cash to get the Hypertruck ERX system to market, and put together the right partnerships to make it all work.
Hyliion probably won't ever be a trillion-dollar company. But it's a smartly led early mover in a space with a big addressable market, and the stock isn't (yet) crazy-expensive.