Can NIO Beat Tesla and Be a Long-Term Winner?

After rallying by more than 1,100 percent in 2020, NIO stock has pulled back lately. While investors were overly enthusiastic when it came to the EV sector in 2020, they have become overly cautious. Most of the EV stocks have taken a beating including Tesla and NIO. Investors want to know if the bottom is in sight for EV stocks, particularly NIO. What is NIO stock’s long-term forecast? Can it beat Tesla?

The rotation to value from growth names as well as the global chip shortage are the major culprits for the across the board sell-off in EV names.

NIO stock has fallen by 30 percent YTD and 46 percent from its 52-week high. With the current drop in NIO’s stock price, investors wonder if the stock will recover. It looks like most of NIO’s downslide is over. The stock has taken most of the factors into account that are having a negative impact on it. Some factors, like the global chip shortage and growth to value rotation, are temporary. The EV company's growth story is more secular. This should lead investors to the stock again and increase its price.

Broadly, the outlook for NIO stock depends on China’s overall EV demand. The EV demand in China has been trending favorably lately. Also, China’s government is making an aggressive push towards making EVs more mainstream. The country is also supporting EV makers. NIO got a government bailout in April 2020 that brought it back from the brink of bankruptcy.

NIO’s long-term future looks bright even if seen from the company-specific catalyst point of view. The company has taken the first step towards international expansion, starting with Norway. The expansion to Europe and then to the U.S. market should open up new markets for NIO. The expansion would support its top line and ultimately the bottom line in the future.

NIO has started taking steps towards fulfilling increasing future orders. The company announced a renewal of its manufacturing agreements with Jianghuai Automobile Group, which included expansion in annual production capacity to 240,000 units. The expansion would almost double its production capacity.

With its brand loyalty, focus on quality, improving execution with increasing sales and deliveries, and new and improved products in the pipeline, NIO’s long-term value could rise by multiples of the current market price.

For a lot of investors, NIO’s winning proposition lies in it beating Tesla in the Chinese EV market. While there's certainly scope for multiple EV companies to succeed in the world’s largest EV market, the prospects of NIO beating Tesla could make it a sure-shot favorite among investors. However, NIO is still far away from Tesla as far as the delivery and production of vehicles is concerned. NIO generated revenues of just $2.5 billion in 2020 compared to Tesla’s China revenue of $6.66 billion.

For NIO and Tesla, the deliveries are expected to rise at a CAGR of nearly 50 percent over the next 4–5 years. Tesla’s deliveries are expected to hit almost 3.8 million vehicles by 2025 with nearly half of them in China. NIO’s deliveries could hit close to 350,000 vehicles by 2025. In absolute numbers, NIO might be behind Tesla but its growth is comparable to and even higher than Tesla’s growth.

In terms of quality, many Chinese consumers already prefer NIO over Tesla. Recently, Tesla faced many challenges in China, including customer complaints and regulatory scrutiny related to the quality of its vehicles. This has dented its reputation in the country somewhat. NIO is working hard to catch up with Tesla in terms of software capabilities. However, it might still be sometime before NIO can overtake Tesla in software development and deployment. In terms of popularity and delivery growth, NIO has the capability to beat Tesla. NIO’s battery-as-a-service (BaaS) could be the key behind it beating Tesla in the Chinese market in the longer term.

For an EV maker or for any automaker, it's important to be present across price spectrums if it wants to capture an increasingly larger share of the market. In that sense, NIO might need to launch a more affordable car to grow its market share among the Chinese masses. Does the company have any specific plans?

Reuters reported in January that NIO might make mass-market products but if it does so it will be under a different brand. The news agency quoted William Li as saying “As EV technologies advance and battery cost lowers, it is possible that we may enter the massive market, but definitely not with Nio brand.”

Through NIO's BaaS, it offers cars to its customers without battery, which they can rent through a monthly subscription. This lowers the upfront price of a vehicle and improves its affordability. The service has been popular in China. NIO is doing everything it can to capture a larger share of the Chinese addressable EV market.