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Is It Time to Sell NIO and Buy This EV Stock Instead?

By Howard Smith - Feb 17, 2021 at 9:47AM

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NIO shareholders have enjoyed an amazing run, but there's a better EV company in China to own.

Investors began buying into Chinese electric-vehicle (EV) maker NIO (NIO -3.98%) in droves last year, hoping to get in on the next Tesla (TSLA 1.39%). NIO has made a major turnaround since its business was in trouble in early 2020, and it traded below $2.50 per American depository share. 

Since then, a government rescue plan and expansion in China's EV market have resulted in the stock exploding more than 2,000% higher. But with a valuation closing in on $100 billion, for future gains, investors looking for a Chinese EV maker would be wise look into Warren Buffett-backed BYD (BYDDY 2.64%) instead. 

red BYD sports car

Image source: BYD.

Sales comparisons

Investors in NIO have reason to be optimistic about the company's future. Auto deliveries have ramped up quickly, and the year-over-year comparison numbers are impressive. NIO reported a 352% increase in January 2021 deliveries compared to the prior-year period. But that still only totaled 7,225 electric cars. For the full year 2020, NIO delivered almost 44,000 vehicles, representing 113% growth over 2019. 

That compares to about 131,000 battery-electric vehicles (BEVs) that BYD sold in 2020. And BYD is not just an EV company. In total, it sold more than 460,000 vehicles for the full year 2020, including other new energy vehicles like plug-in hybrids and commercial buses in addition to fossil fuel-powered vehicles. 

Valuing potential growth

NIO is currently growing much more quickly than BYD, and investors are assigning value to that growth. NIO's BEV sales doubled in 2020 while BYD experienced a drop of 11% versus 2019. Including its other products, BYD's overall sales decreased 7.46% compared to the prior year.  NIO sales are off a much smaller base, but it has some promising offerings to continue to close the volume gap. 

During its NIO Day presentation in January, the company introduced the ET7, which will be NIO's first sedan. It will be available with a new, larger 150 kWh battery pack, giving it a maximum range of about 621 miles. That's further than Tesla's Model S maximum range of 402 miles, as well as the Lucid Motors upcoming Air sedan range of 517 miles. 

But investors are valuing it at 10 times that of BYD when comparing enterprise value to revenue. That metric is also more than twice as high as Tesla's. 

NIO EV to Revenues Chart

NIO EV to Revenues data by YCharts

In good company

BYD also offers investors growth in areas where NIO isn't a player. Revenue from its new energy commercial bus offerings grew 45% year over year in 2020. And overall opportunity in China is going to play in both companies' favor. EV sales in China surpassed 1 million in 2020, and the government hopes to grow that to 5 million by 2025. It could reach 10 million by 2030, and approach 20 million by 2040, according to research organization BloombergNEF.

Investors in BYD would be in good company with one of the world's best investors, too. Warren Buffett first invested in BYD in 2008, and Berkshire Hathaway has 25% ownership in the company through its MidAmerican Energy subsidiary.

Not just a legacy automaker

Investors seem to want to compare NIO in China to Tesla in the U.S. Tesla disrupted the legacy automakers and is using its years-long head start to its advantage as the fossil fuel automakers play catch-up. 

But BYD isn't just a Chinese legacy automaker. It is the one with the head start in the EV sector. Both it and NIO, of course, will face competition from other Chinese EV makers, as well as Tesla, which is now producing both the Model 3 and Model Y midsize SUV at its Shanghai factory. 

After its brush with bankruptcy, NIO is now well funded and should continue to grow. The EV market in China alone should support many companies. But investors have valued NIO like there is no other competition for that market. Yet BYD isn't just competition, it's the more established EV maker. 

Buffett placed a long-term bet on BYD more than a decade ago, and at today's valuations, now would be a good time for investors looking for a Chinese EV maker to join him as a BYD shareholder. 

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Stocks Mentioned

Nio Inc. Stock Quote
Nio Inc.
NIO
$15.79 (-3.98%) $0.66
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$673.10 (1.39%) $9.20
BYD Company Limited Stock Quote
BYD Company Limited
BYDDY
$68.34 (2.64%) $1.76

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