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Investor Does Fundamental Analysis on NIO - Stock Analysis For Beginners

04 Dec 2020


00:00 About NIO

Did you read the title of this video? If you haven’t, read it again! And no, it’s not a typo!

NIO stock was at around $3 in January this year then went down to around $2 in April but since then have skyrocketed to $50 recently in end November (2020).

That’s an increase of OVER 2000%. So, let’s say you invested $1,000 in NIO back in April, it would be over $20,000 dollars now.


Hey guys, I’m Alex. Welcome to Behind The Stock where I dissect company information and annual report to discover and identify investment opportunities for you.

In this episode, let’s take a look at NIO!

Listed on New York Stock Exchange, this has been a very, very hot stock lately. I have requests to analyse this company from left, right, up, down. Sleep also dream about NIO.

With their insane share price gain year-to-date, many are wondering if NIO stock is in a bubble. Will it crash soon or can it continue to grow?

I know many of you only care about one thing.... "ALEX, CAN BUY OR NOT? WILL I GET OVER 2000% GAIN IN HALF A YEAR?"

To be honest, these are questions I don’t have answers to because I’m not a fortune teller. BUT what we can do is look at the fundamentals of the company – that is the most important!

Let’s start with NIO’s business model!

01:32 NIO Business Overview

NIO is a pioneer in China’s premium smart electric vehicle (or EV) market. Founded quite recently only in November 2014, NIO designs, jointly manufactures, and sells smart and connected premium electric vehicles.

Aside from selling electric cars, the company also provides users with comprehensive, convenient, and innovative charging solutions and other user-centric services. The business also includes innovation in next-generation technologies in connectivity, autonomous driving, and artificial intelligence.
NIO’s first release is the ES8, followed by ES6 and now the latest launch is the EC6. And recently, it is ranked number one in terms of quality for electric vehicles in China!

02:18 NIO Growth Potential

Moving on to the growth potential of NIO.

The EV market is expected to reach $800 billion by 2027, which would translate into a CAGR of 22%. Much of this growth will come from the Asia-Pacific region, which is where NIO primarily operates in.

According to NIO’s management, they forecasted deliveries of NIO vehicles to be around 17,000 for the fourth quarter of 2020. This would represent approximately 100% increase from the same quarter of 2019 and 35%-39% increase from the third quarter of 2020.

Revenue would also increase around 120% from the same quarter of 2019 and around 40% increase from the third quarter of 2020.

In fact, NIO still has plans to upgrade monthly production capacity to around 12,500 vehicles (that is 150,000 annually) without significant investment to reach that figure.

Another growth factor to consider is NIO’s Battery as a Service (BaaS) model which was launched in August. This will enable NIO users to benefit from the lower initial purchase prices of vehicles, flexible battery upgrade options and assurance of battery performance.

With the BaaS model, it will also encourage fleet operators to consider NIO cars. In fact the NIO ES6 was selected as the ground support vehicle at the Beijing - DaXing International Airport. This could be just the start. There’s a lot of potential for NIO’s electric cars to be airport taxis, hotel taxis and maybe eventually expand to police vehicles, and taxi fleet.

So, in terms of Alex Meter, I would rate NIO has high growth potential.

03:50 NIO Moat

Now, let’s look at the strength or competitive advantage of NIO.

First strength that NIO has is the BaaS model. The BaaS model allows users to purchase electric vehicles and subscribe the usage of battery packs separately. Customers can buy the car at RMB70,000 off the original price but only pay a monthly subscription fee of RMB980 for the battery pack.

When announcing the new energy vehicle subsidies, China also stated that they would support the sale of cars with swappable batteries. Because of the BaaS model, NIO vehicles including higher end models would qualify for subsidies.

The BaaS model reduces the overall cost of NIO vehicles, creating competitive pricing, hence attracting more customers. 

The second strength is NIO’s brand and community.

The company is also building an EV ecosystem and community unlike any other company. Their slogan is “a space for NIO’s users and friends, a joyful lifestyle beyond the car”. They are doing that through NIO Houses and NIO Spaces.

A typical NIO House is a coffee shop open only for NIO users, but also serves as a day care center, a library and a meeting room and a place for other social activities. With this, NIO hopes to build a deeper relationship with its customers.

NIO Space, on the other hand, is on a smaller scale that mainly serves as a showroom to help users who are interested in NIO's products while living in areas without NIO Houses.

So, in terms of Alex Meter, I would rate NIO’s strength as pretty strong.

05:18 NIO Risks

As for the risk of NIO, it would be dilution of shares.

As of December 2019, NIO’s total borrowings came up to over RMB8.3 billion which is about $1.2 billion. The borrowings primarily consisted of convertible notes at RMB6.4 billion or $931 million.

Convertible notes refers to debt that can be repaid using equity or shares in the company. So, by issuing convertible notes, in future, NIO will have to issue more shares during conversion, hence the shareholder dilution risk.

The second risk for NIO is competition. Not just from Tesla but also many other EV manufacturers. In fact, there are three Chinese premium EV makers listed in the US stock markets. Aside from NIO, there’s also Li Auto and Xpeng.

However, do take note that Tesla has filed a lawsuit against Xpeng. Tesla claims that Xpeng stole and used its Autopilot source code. Meanwhile, Li Auto doesn't offer a pure electric vehicle. Instead, it’s a gasoline engine and electric motor hybrid. This means that Li Auto would have to build a new vehicle from scratch if they want to remain competitive in the EV market.

So, in terms of Alex Meter, I would rate NIO’s risk as medium to high.

06:31 NIO Financial

Next, let's look into the financial of NIO. Looking at its revenue from 2018 until 2020 this year revenue has been growing very, very fast from RMB 4,900 to RMB 12,465. Do note that all these figures are in millions.

In terms of the net income, they experienced losses as of now. If you look into the debt-to-equity ratio, currently it's trading at 0.69x which is at relatively high debt level. When we look into the cash flow from operations, you will realize it's a negative figure and free cash flow is also negative figure.

So from this quick analysis, in terms of financial part, it's not very healthy. However, looking at recent quarter 3, the company reported revenues of RMB 4,266 representing growth of more than 146% over the prior year period. Also, the company is finally showing decent margin improvement.
Vehicle margin in Q3 was 14.5% up from 9.7% in Q2 2020 and a -6.8% in Q3 2019. This has resulted in a significant narrowing of the company's net loss. With strong revenue growth combined with better operating efficiency, the company may be able to report a profit very soon. 

As its financial is improving, in terms of Alex Meter, I would rate NIO’s financial as medium risk.

07:52 NIO Valuation

Finally, let's look into the valuation of NIO. Based on current price to sales which is trading at 40x multiple. Assuming 40% sales growth, its forward P/S is about 28x. With the current growth rate and profit margins, current valuation is not a price that I'm comfortable to pay.

08:13 Likes & Dislikes about NIO

Here are the 3 things I like and 3 things I dislike about NIO. The first thing I like is the growing total addressable market. China is looking to grow the new energy vehicles (or NEV) market which includes electric cars. China is the world’s biggest auto market and sales of NEV is expected to account for 20% of overall new car sales by 2025 from just 5% now and half of overall new sales by 2035. Together with the government subsidy for NEV this will drive up sales of electric vehicles which can be a good thing for NIO since they’re the leading EV maker in China

And the second thing I like is the growth potential with the introduction of BaaS. The business model is not only convenient for clients but it also makes the NIO cars cheaper to purchase. This is a good competitive advantage for NIO with lots of room to grow.

And the third thing I like is NIO’s focus on brand building and community building. This helps NIO connect with customers and also stand out from the other EV makers.

Next, these are the 3 things I don’t like about NIO. The first thing is the negative cash flow and free cash flow which means they will need to rely on debt to sustain the business. This will risk further share dilution.

And the second thing I don't like about the business is the current valuation is fully priced in the growth expectation. Any slow down in growth and profitability due to competition or missed guidance will heavily impact the share price. Do note that in 2019, NIO did not meet its guidance, hence, the share price crashed from IPO price of USD 6.26 to USD 2 range

And the third thing I don't like about the business is NIO does not manufacture its own cars.
Instead, state-owned automaker JAC Motors manufacture for them. This means NIO will lose certain flexibility. On top of that, NIO disclosed that JAC Motors receives a fee for every vehicle that comes off the line. NIO also has to compensate JAC Motors for any operating losses during the first three years of the deal.

So, after watching my analysis, would you consider adding NIO into your portfolio?

Comment down below, if you have any thoughts and insights about NIO that, you would like to share, so that we can discuss and learn from one another. Any other companies you would like to see me analyse? Submit your requests in the comments box. And do give this video a like, share it with your friends and family, so that they can benefit from this knowledge as well.

We have a new episode of Behind The Stock every Friday. Remember to subscribe to VI Channel, turn on the notification bell so that you don’t miss out my future videos.

Till then, I'm Alex, goodbye


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