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Will Nio Recover in 2022?

By Rekha Khandelwal – Jan 2, 2022 at 8:17AM

Key Points

  • Nio is one of the top players in the Chinese EV market.
  • Deliveries of the company's new luxury sedan, ET7, are planned to begin in March.
  • Nio stock is trading at an attractive valuation compared to stocks of top U.S. EV start-ups.

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The Chinese EV stock fell more than 40% in 2021.

For electric vehicle (EV) investors, China is an attractive market. Global EV sales are estimated to be roughly 6 million units for 2021. Of these, China alone is expected to account for around 2.9 million units. 

Yet, investors remain skeptical about investing in Chinese stocks. Considering some key developments in China in 2021, such skepticism looks reasonable. However, assuming you've already considered that risk in the context of your portfolio, let's discuss whether it is a good idea to buy Nio (NIO 0.48%) stock right now.

Nio operates in a competitive market 

As a leading market for EVs, China obviously attracts top global players. Nio competes with established players, including BYD and Tesla, as well as with newer entrants, including Li Auto and XPeng. Further, Nio also faces competition from legacy automakers, including Volkswagen and General Motors, which are looking to capture a portion of the fast-growing Chinese EV market.

In November, BYD sold 90,546 EVs in China, compared to around 10,700 vehicles delivered by Nio. By comparison, Tesla sold 52,859 EVs in China in November. 

There is a lot to like about Nio

After launching its first car in 2016, Nio has delivered more than 156,000 electric vehicles so far, with 80,940 delivered in 2021 (through November). The company's recent sales growth indicates a robust demand for its vehicles.

NIO Revenue (Quarterly) Chart

NIO revenue (quarterly). Data by YCharts.

Among Chinese pure-play EV companies, Nio is a top player both in terms of revenue and revenue growth. Notably, BYD derives only a little over half of its revenue from vehicle sales. There are some key factors that differentiate Nio from its competitors. 

First, Nio's innovative Battery-as-as-Service model allows its users to swap batteries of their EVs with new ones at any of the company's 700 battery swapping stations. Users can swap their discharged batteries quickly if they are short of time to recharge it. Alternatively, they may choose to swap a battery and go for a bigger or smaller pack, depending on their specific need. Nio has done more than 5.3 million battery swaps so far, indicating a robust demand for the same. 

Second, Nio is launching two new models: the ET7, a luxury sedan, and the ET5, a mid-size sedan. Moreover, the company will launch a third new model in 2022, which hasn't been unveiled yet. Not many of its competitors are planning to launch as many new models in the year. Further, these upcoming models are expected to be among the best in their target segment.

Both ET5 and ET7 come with Renminbi (RMB) 680 (around $106) monthly subscription for autonomous driving updates. Further, both have different battery options, from a 75 kilowatt-hour (kWh) (70 kWh in ET7) standard-range battery to a 150 kWh battery, which can go 620 miles on a single recharge. Deliveries of ET7 are expected to commence in March and ET5 in September. 

A Nio ET5 automobile.

Image source: Nio.

The ET5 model is priced at RMB 328,000 (roughly $51,500) while ET7's price starts from RMB 448,000 (around $70,300). These two new models are expected to receive a positive response from customers, boosting Nio's sales in 2022. That could also support the stock's price in the new year. 

Is Nio stock a buy?

Nio stock is trading at a forward price-to-sales ratio of around 4.6. That's comparable to that of its peers Li Auto and XPeng. However, Nio's ratio has improved significantly from around 10 in January 2021.

NIO PS Ratio (Forward 1y) Chart

NIO PS Ratio (Forward 1y). Data by YCharts.

By comparison, BYD stock is trading at a price-to-sales ratio of around 3. As Nio is still not making profits, price-to-sales ratio is useful for comparing its valuation relative to its peers. A lower ratio is considered better. 

Again, Nio stock looks much better valued compared to stocks of U.S. EV companies, such as Rivian or Lucid, each of which has delivered only a few hundred vehicles so far.

Apart from the domestic China market, Nio is targeting European markets for expansion. It started deliveries in Norway in September and is looking to enter five more countries in 2022. If successful, this expansion will establish Nio as a top EV maker that can meet global quality standards.

Despite competition, Nio has been growing its sales so far. Its upcoming models, international growth plans, and innovative offerings positions it well for long-term growth. Growth prospects, combined with a relatively attractive valuation, makes Nio stock appealing right now.

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool owns and recommends BYD, NIO Inc., Tesla, and Volkswagen AG. The Motley Fool has a disclosure policy.

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