Tesla vs. NIO: Which EV stock is the best buy?
Tesla, Inc. (TSLA) is the world’s largest maker of electric vehicles, while NIO Inc. (NIO) is one of the top three pure NEV makers in China. Notably, the two companies were recently singled out by Ford(F) CEO Jim Farley as its fierce competitors in the electric vehicle market. He emphasized (edited): “Ford will go further because we know our competitors are NIO and Tesla, and we have to beat them, not match them.” Also, this wasn’t the first time Farley had mentioned the two companies. He also praised the two companies during a January appearance on Yahoo Finance. He articulated (edited):
Well, the companies that I think I admire because of their commitment – and frankly, the hard work they’ve done to earn their reputation – are companies like NIO and Tesla. They have been there for a long time. They design their vehicles differently. I have great respect for Tesla’s profitability. They are now earning over $10,000 per vehicle in their second quarter earnings.” (Yahoo Finance)
Therefore, while NIO is currently a much smaller and unprofitable rival to Tesla, investors shouldn’t write off NIO so quickly. Nonetheless, we also don’t believe that Tesla’s leadership could be threatened by NIO’s surge in the near term. Nonetheless, we discuss how investors might consider owning both companies in their portfolios and reveal our favorite buy.
Key NIO and Tesla Stock Indicators
Readers can glean from the chart above and observe that TSLA stock is currently valued at a much higher valuation than NIO stock. The NTM earnings multiple of TSLA stock is 10.1x, compared to the NIO stock multiple of 3.4x. However, the speculative fervor for NIO stock saw its valuation even surpass Tesla stock between late 2020 and early 2021. Keen EV investors should have known that NIO was overvalued at the time, given its lack of profitability and scale.
Therefore, investors should not be surprised that NIO stock has slumped in stunning fashion since its January 2021 highs. Nonetheless, NIO investors might also point to headwinds regarding its potential delisting and spin-off. of the market outside of Chinese equities. As a result, TSLA equity investors did not experience the value squeeze experienced by NIO investors.
However, both companies have alarming FCF returns. As growth investors, we can accept it if these companies have not yet been optimized for FCF profitability. But the margin for error is less and investors need to ensure they have strong conviction on these stocks. For example, TSLA stock has an NTM FCF yield of 0.94%. However, the FCF yield of NIO stock is in the red. Therefore, if you are investing in NIO, you should observe its path to profitability as it evolves.
Do NIO or Tesla work better?
It should be obvious that Tesla is a solidly profitable electric vehicle maker, while NIO is still not profitable. Nevertheless, NIO has made huge strides towards profitability as it scales. However, we do not expect the business to become profitable in the short term. Moreover, the company is still in a phase of rapid global expansion. It is also investing aggressively to build its battery exchange infrastructure, charging infrastructure and business footprint.
If we base our analysis on their profitability, it’s clear that Tesla might be the safest bet here. In contrast, NIO’s emphasis on battery swapping to differentiate itself from its peers will continue to affect its near-term profitability.
Is NIO or Tesla Stock a good long-term choice?
Tesla has just declared its total deliveries from Giga Shanghai. Its deliveries in February fell to 56.5,000 vehicles from 59.8,000 in January. However, this still represented a remarkable 209% year-over-year increase, validating the incredible uptime of its Shanghai plant. We are confident that the run rate of Giga Shanghai could approach 1M in the future with necessary upgrades. It’s already close to an 800K run rate this year.
Besides, Tesla is also planning to build a new factory in Shanghai which could increase its production capacity in China to 2M in the future. Coupled with its recent endorsement from Berlin, which could eventually produce 500,000 units a year, Tesla has rapidly increased its production capacity.
The company has also been able to alleviate the chip shortages that have plagued its legacy peers. Berlin could help overcome export logistics challenges to meet its European demand. Moreover, Shanghai can then be dedicated to China’s thirst for electric vehicles. The Chinese government is confident that it could reach its 20% share of VNE in new sales by 2025. Recently, the government even pointed out that it could exceed its 2022 target. Automobile Manufacturers Association (CAAM) estimated that NEV sales in China could reach 5 million in 2022, accounting for 18.2% of new car sales. Therefore, we believe Tesla is ramping up capacity as quickly as possible to meet the growing demand for electric vehicles in China. Moreover, the delivery time of its Model 3 in China was recently extended to 16-20 weeks. Previously, its Chinese customers could expect delivery between 12 and 16 weeks.
Thus, we strongly believe that Tesla could continue to perform well despite more intense competitive pressures from traditional automakers. The green tidal wave should continue to support robust consumer adoption. Additionally, the record spike in oil prices due to the Russian-Ukrainian conflict could encourage consumers to adopt electric vehicles to replace their ICE vehicles. Given Tesla’s rapid rise in power, we believe it is well prepared to meet such demand.
NIO has also telegraphed an ambitious plan to increase capacity. In particular, NIO works with its industrial partner JAC for its production capacity. However, its trailing twelve month delivery rate of 94.4,000 vehicles pales in comparison to Tesla’s FY21 deliveries of 936,000. Therefore, NIO is not in the same league as Tesla in terms of production capacity. Nevertheless, the company also has a viable plan to increase production to 600K over time. Additionally, it has also started expanding into European markets, starting with its commercial footprint in Norway in 2021. The company has telegraphed an ambitious plan to be present in 25 countries and regions by 2025.
By comparison, Tesla has undoubtedly proven its manufacturing ramp and execution. Also, it does not rely on an external manufacturing partner like NIO. Therefore, we believe that he has much better control over his production. Moreover, Tesla’s product has already garnered global appeal. On the other hand, NIO needs to determine whether its European consumers like its new flagship ET7 sedan when it launches later this year. The ET7 is expected to first launch in China at the end of March before reaching European markets later.
Therefore, we think it’s pretty clear that Tesla has a proven business model. It should appeal to EV investors who prefer to stick with a trusted brand. Running NIO is still a work in progress, although it worked reasonably well. Therefore, its potential can be considered more speculative.
Is NIO or Tesla Stock the best buy?
TSLA stock is trading just below its average consensus price targets (PT). Moreover, it is also in our fair value zone. Additionally, average PTs have strongly supported TSLA stock performance over the past three years. Therefore, he has been a relatively reliable source of support that investors can rely on.
On the other hand, headwinds on NIO stock impacted the accuracy of its consensus PTs. As a result, we can observe that even the most conservative PTs have been wrong throughout the past year. Given NIO’s unprofitable business model and association with China, investors face higher execution and political risks. Therefore, we believe that NIO shares are only suitable for speculative investors.
As a result, we think TSLA stock is the best buy now. Although not significantly undervalued, we believe it is fairly valued. We also believe it is well positioned to ride the favorable winds for EV adoption in 2022, given the strength of its production ramp.