Nio (NIO 8.72%) and QuantumScape (QS 5.69%) might seem like two very different ways to invest in the electric vehicle (EV) market. Nio is a leading producer of electric sedans and SUVs in China, while QuantumScape is developing solid-state batteries, which could significantly boost the stability, charging time, and range of EV batteries.
But batteries are also a big part of Nio's business. Nio differentiates itself from its competitors with removable batteries that can be quickly replaced at its battery-swapping stations. It's also been developing its own solid-state batteries.
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Nio and QuantumScape both ran out of juice as rising interest rates drove investors away from speculative EV plays.
Nio went public at $6.28 per American depositary share in 2018, soared to a record high of $62.84 in early 2021, but dropped back to $5.
QuantumScape's stock opened at $24.80 after it merged with a special purpose acquisition company (SPAC) in 2020. It hit its all-time high of $131.67 less than a month later, but it now trades at about $6. Should investors buy either of these burned-out EV stocks?
Nio needs to survive a grueling price war
Nio started to deliver its first vehicles in 2018, and its deliveries increased by 81% in 2019, 113% in 2020, and 109% in 2021. Those incredible growth rates convinced the bulls that Nio was in a position to become the "Tesla of China."
But in 2022, Nio's deliveries only rose 34%. And in 2023, they grew 31% to 160,038 vehicles. As those deliveries slowed down, its vehicle margin declined from 13.7% in 2022 to 9.5% in 2023.
Nio blamed its slowing growth and shrinking margins on supply chain constraints, tough macro headwinds in China, and the ongoing price war in China's crowded EV market. As the company slashed its prices to stay competitive, it ramped up its spending on its battery-swapping networks and overseas expansion. As a result, its total adjusted operating margin worsened from negative 27% in 2022 to negative 36% in 2023.
Those challenges seem dire, but Nio's vehicle margin still expanded sequentially over the past three quarters, which suggests its prices are stabilizing in a difficult market. It should also gradually narrow its net losses as it scales up its battery-swapping networks.
Looking further ahead, it could gain a competitive edge when it finally installs its solid-state batteries -- which have been tested on its vehicles over the past three years -- in its commercial EVs.
For 2024, analysts expect Nio's revenue to rise 27% to 70.8 billion yuan ($9.8 billion) as it slightly narrows its net loss from 15.5 billion yuan to 13.1 billion yuan ($1.8 billion). The EV maker still has a lot to prove, but its stock looks cheap at just 1 time next year's sales -- and it could head a lot higher once it stabilizes its business.
QuantumScape needs to start generating revenue
QuantumScape is much harder to quantify than Nio because it hasn't commercialized its solid-state batteries to generate any meaningful revenue yet. Volkswagen is one of its top investors, but the German automaker also reportedly held talks to forge a similar partnership with the French solid-state battery maker Blue Solutions over the past year.
QuantumScape's newest solid-state batteries for EVs have a range of 400 to 500 miles and a charge time of less than 15 minutes. It's also developing a new generation of batteries that could reach 600 miles with a charge time of less than 30 minutes.
Those upgrades could disrupt the current market for lithium-ion batteries, which have a range of approximately 300 miles and a charge time of 30 minutes.
They're also more resilient than lithium-ion batteries. After conducting its first endurance test earlier this year, Volkswagen said that QuantumScape's batteries could power an EV for over 310,000 miles without any noticeable loss of range. By comparison, most lithium-ion batteries lose about 10% of their range after 200,000 miles.
That technology sounds promising, but plenty of other companies -- including Blue Solutions, Nio, and Toyota -- are developing their own solid-state batteries. If QuantumScape fails to beat those competitors to the punch, its money-burning business -- which posted a net loss of $445 million in 2023 without generating any revenue -- could quickly crumble.
On the other hand, it could still have plenty of upside potential if it successfully commercializes its batteries.
The better buy: Nio
Nio and QuantumScape are both speculative stocks. But if I had to pick one over the other, I'd buy Nio because it's scaling up its business, generating stable revenue, and it trades at a discount to its sales growth. QuantumScape hasn't proved that its business model is sustainable yet, and it could burn a lot more cash before it commercializes its first solid-state batteries.
