FULL REPORT: NIO_Is_More_Expensive_Than_Tesla
In 2020, NIO (NIO)’s share price has gone from less than $4 to more than $45-$50. It is the time that somebody stands out and notes that the company may be overvalued. NIO trades at 21x-23x sales, with Tesla (TSLA) trading at close to 16x. The company does not even show annual gross profit margin. In addition, the company reduced its headcount in 2019, and cut its R&D expenses. I don’t see how that will help increase sales growth from 2020. To sum up, if you are not here to hold the stock for five years or more, you may sell your shares.
NIO
China-based NIO is a manufacturer of premium smart electric vehicles. It is an established fact that NIO is widely known for being the chinese competitor of Tesla.
The company started making deliveries of its first car, the ES8, in June 2018. In December 2018, NIO launched the ES6, a smaller and more affordable model than ES8. The first ES6 models were received in June 2019. Finally, in December 2019, the company launched the EC6, its last model, which users started receiving in September 2020.
Very recently, the company also launched the 100-kilowatt-hour battery pack, which can be used by all NIO drivers. The new system offers driving rage for the new models. It provides a driving range from 580km to 615 km.
Investors who had a look at the prospectus may have seen the following text. NIO promised to deliver one new model each year. That would be extremely beneficial for shareholders. More models means more market size, and most likely more future sales. Having noted this, let me mention that in 2019, the company reduced its headcount. In addition, it appears to be reducing the amount of money allocated to research and development. With these actions, I don’t see the company delivering a lot of new models each year. Companies that grow massively don’t usually reduce their headcount:
Our goal is to launch a new vehicle model each year for the near future as we plan to offer our users more choices to suit their preferences and target different segments within the premium electric vehicle market in China. We plan to mainly sell our vehicles in China for the near future. Source: Prospectus
There is another clear fact that may limit the company’s sales growth. As of June 30, 2020, the company reported 320k charging piles in China. These are charging stations, which NIO drivers can use. The Chinese government has a target of 4.8 million charging piles. This means that China is still far from reaching sufficient number of stations for EVs. I hate being the person pointing this out. However, if the company cannot offer sufficient stations, I would not expect that many clients in China will buy cars from NIO. Shareholders need to clearly understand this risk. In my view, it makes sense to invest in electric vehicles in China only when the government offers sufficient infrastructure.
NIO is a revolutionary car, which includes Linux systems, connection to the cloud, and many software applications. Interestingly, when you buy a car, NIO will be able to install updates for firmware and other software. While this appears to be a valuable advantage, in my opinion, drivers are not having anymore a car, but a “driving computer.” In this regard, I need to point out that the company may suffer from cybersecurity issues:
“The vehicle will be connected to our information cloud at all times, and when there is a firmware or software update available, our cloud will push an update message to the vehicle which triggers an update. Upgrades will be wirelessly downloaded to the vehicle, installed, and launched, including updates for firmware, software, operating systems and applications.
Our proprietary software leverages Linux, QNX and Android systems and control systems such as the central digital cockpit, connected gateway, ADAS and cyber security systems.” Source: Prospectus
Number Of Employees And Vehicles Sold
Most companies deliver their sales estimates and the amount of vehicles to be sold. Interestingly, most analysts don’t check the amount of resources that companies have to reach those goals. In my view, the amount of employees is a great measure of resources. The larger the headcount, the easier will be for a company to manufacture cars.
I compared the total amount of employees hired by Tesla with the amount of employees hired by NIO. Tesla’s vehicles/employees ration was 1.8. NIO believes that it will be able to manufacture 16,000-17,000 vehicles with 7442 employees. It means that NIO’s vehicles/employees ratio is close to 2.3. My take on these figures is that NIO is a bit more optimistic than Tesla on the amount of vehicles that it will be able to produce.
That’s not all. NIO had to reduce its headcount in 2019. I find it very interesting that the company continued to deliver significant sales growth after conducting restructuring. In my view, in late 2020 or 2021, we may see that you can’t produce many more cars with less people:
“Furthermore, in order to control labor cost, we conducted a series of organizational restructuring to cut headcounts in 2019, which we believe has negatively affected our reputation, brand image and our ability to retain the remaining qualified staff and skilled employees.” Source: Prospectus
Taking a look at the sales/employees ratio is even more interesting. Tesla’s sales/employees ratio is close to 0.3. If we use sales expectations and NIO’s headcount, NIO’s sales/employees ration is close to 0.9. This means that NIO is obtaining a large amount of sales without hiring many individuals. At the moment, the strategy is working out. However, Tesla and NIO operate in the same industry. I don’t think that I will be able to work for a long time. To sum up, I believe that NIO will need to hire many more individuals to obtain the sales estimate given for 2021-2022. In 2019, it reduced the headcount, which makes delivering sales of more than $6 billion in two years even more difficult.
Income Statement: Less R&D
Most analysts are talking about NIO’s sales growth quarter on quarter. NIO has delivered massive sales growth, which I believe the market has discounted. With that, nobody talks about the massive decrease in research and development. Let’s talk about it. In the quarter ended September 30, 2019, R&D/Sales ratio was 59%. In the same period in 2020, NIO reported a R&D/Sales ratio of 13%. In my view, if NIO reports less amount of money in R&D, the total amount of new products will not be that significant. I don’t see that as a positive feature. I also dislike that financial advisors are not talking about this fact.The explanation given by NIO is given below. It is trying to reduce costs and increase efficiency. If I were a shareholder, I would not be happy. Growth companies have to do R&D. In my opinion, that’s the only way to obtain sales growth for a significant amount of years.
“The decrease in research and development expenses over the third quarter of 2019 was primarily attributed to the higher design and development costs incurred in the third quarter of 2019 for EC6 and all-new ES8 launched in the fourth quarter of 2019, and the Company’s overall cost-saving efforts and the improved operational efficiency in research and development functions since the fourth quarter of 2019.” Source: 10-Q
Balance Sheet
As of September 30, 2020, NIO reported $2.84 billion in cash and an asset/liability ratio of 1.7x. I like that the balance sheet looks very stable. The fact that the company has a significant amount of cash is also very beneficial. Clearly, with that amount of cash, I would not expect NIO to raise equity any time soon.
Having mentioned that the balance sheet looks healthy, I would mention that certain assets are hard to value. The company reported $0.7 billion in property plant and equipment, and right-of-use assets worth $0.2 billion. These assets represent $0.9 billion, 18% of the total amount of assets. Property plant and equipment is registered in the balance sheet at a price of acquisition. The right-of-use assets may also not be the price that the company would obtain if it tries to sell the rights. I am not telling that the total amount of assets may be worth less than the current value. However, investors need to be aware of these hard-to-value assets.
If you take a look at the list of liabilities, you will find $0.14 billion in short-term borrowings and $0.9 billion in long term borrowings. The company has a massive amount of cash. I don’t really get why NIO is not using the cash to repay that debt. Shareholders are paying interest rates when they don’t have to pay it. Clearly, it is a bad management decision.
NIO Appears More Expensive Than Tesla
Each ADS represents one class A ordinary share. The weighted average shares outstanding are 1.2 billion shares. At $48-$52, market capitalization becomes $57-$62 billion. With borrowings of $1 billion and cash of $2.8 billion, the enterprise value is equal to $55-$60 billion. Quarterly sales are equal to $666 million, so annual sales revenue will most likely be close to $2.6 billion. If we use that figure, NIO’s EV/Sales ratio is equal to 21x-23x sales, which I believe is quite expensive. Notice that Tesla (TSLA) trades at 16x sales with a gross profit margin of 21%. NIO does not report annual gross profit margin. NIO’s sales growth is larger than that of Tesla. However, I don’t see that sales growth could justify such a valuation. Remember that the company may have to hire a significant amount of employees to obtain significant sales growth in 2021. Most analysts would not expect significant sales growth right after the company had to fire certain employees.
Conclusion
I firmly believe that NIO will become a well-known brand in the following years. Investors are giving a large amount of money to the company, and the technology looks quite futuristic. Congratulations if you bought shares at $17 because right now they are selling at more than $45-$50. With that, I think that the shares are overvalued right now at 21x-23x sales. Tesla trades at close to 16x sales, and reports positive gross profit margin. Right now, NIO is not a profitable company. Though NIO’s sales growth is larger than that of Tesla, I don’t see that the current valuation is justified. Notice that the company reduced its headcount and diminished the amount of R&D expenses. I wonder how investors expect that these factors will not push down NIO’s sales growth in the near future.
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FULL REPORT: NIO_Is_More_Expensive_Than_Tesla
Disclosure: We don’t own NIO or TSLA
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