In recent months, I have expressed my concerns about the Chinese electric vehicle manufacturer‘s growth in deliveries NIO Inc. (NIO). Specifically, I sounded the alarm about a growing gap between NIO’s shipment growth rates and its peers, and warned that slower shipment growth could negatively impact the valuation of NIO.
NIO’s electric vehicle deliveries were again a disappointment in February, with growth slowing to single digits, raising questions as to whether the company deserves its high sales multiple.
NIO loses the EV race – Part II
If your competitors are growing faster than you, that’s a red flag. Companies that grow faster than their competitors can, for obvious reasons, capture a bigger share of the market, grow production and revenue faster, and reach profitability faster.
Unfortunately, the company losing ground to the competition here is electric vehicle maker NIO, and in fact the company’s delivery results for February have only legitimized new concerns about growth prospects. of the company’s electric vehicle industry.
I specifically warned of slowing NIO shipment growth months ago in my article titled “NIO: Losing The EV Race” here on Seeking Alpha. At the time, XPeng (XPEV) and Li Auto (LI) were already selling NIO by a wide margin, and HOZON Auto, a newcomer to China’s electric vehicle industry, is also advancing in the sale and delivery of Neta-branded crossover SUVs. HOZON Auto and Leap Motor, which are not yet publicly listed, are the fastest growing electric vehicle companies discussed here, outpacing NIO’s growth rates.
My concerns about NIO’s growth trajectory were confirmed in January when the company reported a paltry 33.6% year-over-year shipment growth at a time when Li Auto and XPEV reported shipment growth rates above 100%.
When the company’s most recent delivery achievements are factored in, NIO’s growth trajectory looks even worse. In February, NIO only delivered 6,131 electric vehicles to its customers, down 36% from January, which was already a bad month for NIO in terms of growth and total deliveries. The month’s shipment growth rate fell to single digits (9.9% year-on-year), raising concerns about NIO’s growth.
Competition is growing significantly faster than NIO
Again, comparable EV manufacturers have increased deliveries much faster than NIO. In February, the fastest-growing electric vehicle company was Leap Motor, which delivered 3,435 electric vehicles, a year-on-year increase of 447%. Neta, a subsidiary of HOZON Auto, delivered 7,117 vehicles in February, a year-on-year increase of 255%. Li Auto and XPeng delivered 8,414 and 6,225 electric vehicles respectively, representing annual growth of 265.8% and 180.0%.
Given the phenomenal growth rates of the competition, NIO’s 9.9% year-over-year growth rate will not be enough to maintain its high sales multiple. The significant delay in deliveries is an issue specific to NIO, and investors may want to apply a larger valuation discount to NIO shares in the future to account for slower deliveries and sales growth.
Implications for the evaluation of the NIO action
The fact that NIO’s February shipment growth fell into single digits is significant for the stock, as it provides a very credible reason for the market to apply a larger valuation discount to NIO relative to its competitors. NIO shares are already trading at 52-week lows, and they could fall even further if the market sees below-average shipment growth rates as NIO’s “new normal” in 2022.
Since HOZON Auto and Leap Motor are not yet listed on the stock exchange, the financial information of these two companies is not available. However, we can compare NIO to other competitors who also sell significant numbers of EVs each month. These two are known as XPeng and Li Auto. As shown in the chart below, the market has started applying a valuation discount to NIO over the past few months.
Things could get even worse for NIO
The 9.9% shipment growth fundamentally disproves the argument that NIO should be a high multiple stock. NIO traded at a high sales multiple, primarily due to expectations of above-average delivery and sales growth. With shipment growth slowing to less than 10% year-over-year, the case for a high sales multiple becomes less compelling.
However, things could get worse for NIO in 2022 if the market concludes that NIO’s competitors are better bets for above-average EV sales growth. Given much faster and better execution competition, the valuation discount to peers is expected to increase significantly in 2022.
The risks posed by NIO’s slowing growth in electric vehicle delivery are significant. NIO has a high sales multiple due to the expected scaling opportunity in electric vehicle sales, and this multiple is inextricably linked to how quickly NIO can deliver its electric vehicles.
The slower the pace of shipment growth, the longer it will take for NIO to generate the kind of revenue the market expects NIO to generate. With revenue potentially pushed into the future, NIO’s multiple is vulnerable to significant compression.