The Chinese EV sector has caught investors’ imagination in 2020, no company more so than Nio Limited (NIO). Shares have skyrocketed by over 1000% year-to-date.
Heading into today’s Q3 earnings after market close, Deutsche Bank analyst Edison Yu expects “record revenue/profitability, driven by higher volume, lower battery costs, and continued operational improvements.”
While the analyst rates NIO shares a Buy, his $34 price target implies a steep 25% drop from current levels. (To watch Yu’s track record, click here)
Which obviously begs the question: is Nio overvalued?
While Yu plans to assess the discrepancy between rating and price target after seeing the earnings report, the answer is yes, according to a recent report by Citron. The short seller advised investors to sell the stock and move on, arguing Nio’s lofty valuation simply does not reflect its real world standing. The thrust of the report’s argument was based on the upcoming launch of Tesla’s made in China Model Y SUV; The model’s anticipated price cut could damage demand for NIO’s similar offerings - the ES6 and EC6.
Yu, however, addresses this issue.
“While we continue to view this as a risk, we see it as a temporary headwind which will subsequently be more than offset by NIO’s growing brand awareness and broader industry push for EV adoption,” the analyst said.
Yu has several arguments to back up his thesis. The first is based on a belief the TAM (total addressable market) is big enough for both with the focus turned to capturing market share from traditional ICE (internal combustion engine) vehicles. Tesla’s market entry, says Yu, will “structurally take more share away from comparable ICE models over time rather than NIO who is already very price competitive.”
A second argument, which Yu admits might appear “counter intuitive,” is based on Tesla’s “halo effect.” The success of the rival’s made-in-China Model 3 has actually “boosted overall consumer interest in BEVs and attracted buyers who were likely not considering an electric vehicle in the past.”
Lastly, Yu believes the price cut’s impact will be short lived. Using the October Model 3 price cuts’ impact on XPeng’s P7 BEV sedan, the initial sales pressure appears to have eased, with November “likely tracking ahead on a sequential basis.” This indicates to Yu, “that true market share losers will ultimately be incumbent ICE vehicles, not comparable EVs.”
Nio presents a similar conundrum to other Street analysts. Overall, the stock has a Strong Buy consensus rating based on 6 Buys and 2 Holds. However, the $31.74 average price target suggests shares will drop by 30% over the coming months. (See Nio stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.