NIO Effect? Another Chinese EV Maker Files for US IPO
By Mohit Oberoi, CFAUpdated
- NIO stock has rallied this year. The EV (electric vehicle) space has seen a lot of investor interest, and other EV stocks, such as Tesla (NASDAQ:TSLA), Nikola, and Workhorse, have also jumped.
- Another Chinese EV maker, Li Auto, is now looking to capitalize on the EV frenzy and has announced a US IPO. Several Chinese companies are looking to raise capital from the US market, even amid reports suggesting US stock markets might delist Chinese companies.
EV stocks have defied gravity this year. Tesla and NIO (NYSE:NIO) are up 270% and 273%, respectively. Nikola, Workhorse, and Blink Charging have also caught investors’ eye and are up this year. Not only EV stocks have an eye-popping valuation. Tech growth stocks Zoom Video Communication and Shopify are also trading astronomically.
Meanwhile, several analysts have raised a red flag on EV stocks’ valuation. Last month, Goldman Sachs downgraded both Tesla and NIO. However, investors seem to have disregarded analysts’ pessimism.
The NIO effect
EV makers have been on a capital-raising spree this year. In February, Tesla raised capital by issuing shares weeks after CEO Elon Musk denied an equity raise during the company’s Q4 2019 earnings call. Last month, NIO also issued American depositary shares and raised around $430 million. Now, Li Auto has announced a US IPO.
Li Auto’s IPO
Li Auto is backed by Meituan Dianping, China’s food delivery giant. Previously known as CHJ Automotive, Li Auto produces hybrid electric vehicles. Tesla and NIO produce all-electric cars. NIO offers a battery replacement service, which qualifies it for China’s EV subsidy, but based on its car prices, NIO does not otherwise qualify for them.
Last month, China issued new EV guidelines that favor hybrid petrol-electric vehicle cars. Although China is the world’s largest EV market, sales have been on a downtrend since July 2019 after the country lowered its EV subsidies. This year, the pandemic has hit car sales globally, although China’s car sales have recovered from the lows in the first quarter.
NIO and Tesla: Are EV stocks in a bubble?
Many analysts have expressed concerns that EV stocks such as NIO and Tesla are in a bubble. After all, it is difficult to justify Tesla’s market capitalization exceeding that of Toyota (NYSE:TM), the world’s largest automaker. Last year, Toyota sold 10.7 million vehicles, while Tesla sold 367,500. Before the pandemic, Tesla expected to sell over half a million cars this year. However, the company’s Fremont plant was shut for a long time, impacting deliveries in Q2.
NIO delivered 10,331 EVs in the second quarter, marking a year-over-year rise of 191%. The stock has looked unstoppable after the company posted better-than-expected Q2 deliveries, and is up 94% this month. Li Auto sold 9,666 cars in the first half of 2020. Given investors’ appetite for the EV story, they might embrace Li Auto even as the EV space shows every sign of being in a bubble.