NIO Inc. (NIO) designs and manufactures high-tech electric vehicles in China. As a major player and innovator in connectivity, autonomous driving, and artificial intelligence technologies, it competes directly with Tesla (TSLA).
The main value for NIO comes from its competitive positioning in the luxury electric vehicle market (especially SUVs) in China, stemming from its comparable technology combined with its cheaper price point.
Furthermore, as a leading local manufacturer and innovator in high-priority cutting edge technology fields, the Chinese government has a vested interest in NIO’s continued growth and success. This should not only lead to continued financial support through difficult times, but may also lead to the government-controlled media stirring up popular opinion against its main competitors, as it has done with TSLA recently. (See Nio stock chart on TipRanks)
The company is expected to continue generating strong growth on the back of the re-opening of the global economy following the COVID-19 outbreak, as well as the continued robust growth of the Chinese middle class. Moreover, as its advanced automotive technologies continue to emerge and take a greater share of the overall global automobile market, demand for its products and technologies should grow.
That said, the company also has numerous challenges with which to contend. First and foremost, it already faces significant competition from larger companies, such as TSLA, that possess powerful innovative capabilities and strong brand images. Additionally, as a Chinese company, it faces significant political risk (as Alibaba (BABA) recently learned the hard way), accounting risk, and execution risk. The latter risk is due to the fact that it is still a smaller scale business that has to deliver on aggressive growth expectations.
Valuation Metrics
Despite these challenges, NIO still possesses a strong position in the space, giving it a significant edge to leverage in terms of industry-specific consumer data and network. However, its valuation remains elevated. The forward price to cash flow is a whopping 95.6x, and the company is not profitable yet on a GAAP basis, while simultaneously bleeding cash.
The good news is that revenue is expected to triple over the next two years and the business should finally be profitable on an EBITDA basis in 2022, though the EBITDA margin will still likely be razor thin at just 2.3%.
Between its backing from the Chinese government and its $47.2B cash and short-term investments stockpile, it should have the financial backing it needs to fund its ambitious ventures and reach profitability within a few years. However, it remains highly speculative given that it must deliver on massive growth expectations in a short period of time, against significant challenges.
Wall Street’s Take
From Wall Street analysts, NIO earns a Strong Buy analyst consensus based on 8 Buy ratings in the past 3 months. Additionally, the average analyst Nio price target of $61.91 puts the upside potential at 31.98%.
Summary and Conclusions
NIO is a highly speculative investment right now, as it has a very elevated valuation. Therefore, it must deliver on sky-high expectations in the face of numerous risks in order to deliver long-term investors a respectable return.
That said, it still has a lot going for it. Nio is strengthened by its status as a domestic leader in high-priority cutting edge technologies and a high visibility global industry. The Chinese government is likely to continue assisting the company directly and indirectly moving forward, and the strong tailwind from China’s growing middle class should also boost Nio significantly.
Overall, the business is likely to continue growing and analysts remain bullish on the shares here. That said, given its lofty valuation and steep climb to achieve profitability in the face of top-tier competition from the likes of TSLA, the stock remains a risky bet. Investors might be prudent to take that into account before establishing a position.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
Data from Alibaba Group Holding Ltd.’s (BABA) shopping website, Taobao, was found to be illegally scraped by a Chinese software developer, reported The Wall Street Journal.
The developer was found to have stolen more than 1.1 billion pieces of user information such as IDs, mobile phone numbers and customer comments, since November 2019. The e-commerce giant assured customers that they were not financially harmed by this leak. However, it failed to disclose the number of people affected.
Alibaba has been under scrutiny by Chinese regulators of late, mainly due to its decision to scrap Ant Group's IPO, and was also slapped with a penalty of $2.8 billion for taking advantage of its strong position in the market. (See Alibaba’s stock analysis on TipRanks)
In May, Susquehanna analyst Shyam Patil reiterated a Buy rating and a price target of $350 (66.62% upside potential) on the stock. The analyst noted the company has growth opportunities to grab, despite facing certain regulatory headwinds.
Overall, the stock has a Strong Buy consensus rating based on 25 Buys and 1 Hold. The Alibaba average analyst price target of $301.60 implies 43.58% upside potential from current levels. The stock has declined 7.8% over the past year.
Alibaba scores a "Perfect 10" from TipRanks’ Smart Score rating system, indicating the stock has strong potential to outperform market expectations.
Related News:
Corsair Gaming Enters Meme Stocks List; Shares Rise
State Street Provides Upbeat Guidance for Q2 Revenues; Shares Gain 1.3%
Clean Energy Reveals Plans to Develop Natural Gas From Dairies; Shares Roar
We all want to get in on the next big winner in a given sector. The question of whether JD.com (JD) could be the future of e-commerce in China and eventually dethrone Alibaba (BABA) is an intriguing one.
After all, JD is a hyper-growth play in a sector that’s growing rapidly. China’s e-commerce market is absolutely massive, with the country accounting for more than half of all global e-commerce sales. In fact, China’s e-commerce market is more than three times larger than that of the United States.
Given those statistics, perhaps the discussion should not be about who will ultimately win out in the competitive Chinese e-commerce space. After all, these data show that there’s tons of room for multiple players in this market.
That said, let’s take a look at how JD stacks up to Alibaba, and why investors may want to get a piece of JD at these levels.
A Tale of Two Growth Gems
Both JD and Alibaba are excellent businesses. Indeed, investors can do very well owning both in this environment.
Taking a look at key metrics for these companies in comparison is a great way to assess the competitive advantages and disadvantages of both. These numbers are trailing, unless otherwise indicated.
JD.com's price-to-sales ratio is .86, and Alibaba's is 5.3. JD.com's price-to- earnings ratio is 44.7, while Alibaba's is 21.9.
As for EV/EBITDA, JD.com's is 42.5, and Alibaba's at 28.7.
Revenue growth of the two companies is close, but Alibaba is still ahead. JD.com's revenue growth is 33.4%, while Alibaba's is 40.7%.
Gross margins of the two companies differ dramatically: JD.com has a gross margin of 7.9%, and Alibaba's is 41.3%.
Clearly, the data is mixed when we compare both companies.
Both JD and Alibaba are strong growth companies from a revenue growth standpoint. Indeed, a 33.4% growth rate shouldn’t be dismissed by any investor. While Alibaba does hold the upper hand in terms of top-line growth as well as margins, it’s important to note that JD is in catch-up mode. As a smaller competitor, JD is sacrificing margins near-term to grow its share of the market.
Accordingly, investors may want to look at the comparable price/sales metric as the key fundamental metric to assess these companies on with respect to valuation. JD’s lower margins skew the data unfavorably on a price/earnings basis. That said, for a growth stock of this quality, JD still doesn’t look overvalued on this metric either.
Indeed, a price/sales ratio of less than one, for a growth stock of this quality, is obscene. In any other market, JD should be trading significantly higher. It appears the company’s bottom line performance relative to its peers is holding it down.
What Analysts Are Saying About JD Stock
According to TipRanks’ analyst rating consensus, JD stock comes in as a Strong Buy. Out of 17 analyst ratings, there are 15 Buy recommendations and 2 Hold recommendations.
As for price targets, the average analyst JD price target is $102.24, with a potential upside of 43.6%. Analyst price targets range from a low of $80.00 per share to a high of $119.00 per share.
Bottom Line
As far as high-profile growth stocks go, JD remains a top pick for many investors today.
Yes, this is a stock with a lot of hair on it. An unfavorable political climate for Chinese stocks has created a scenario in which investors seem less willing to touch these high-growth plays. Couple this catalyst with the fact that growth stocks have lagged the overall market of late, and investors could have reason to avoid these stocks today.
Nonetheless, for long-term investors looking for a high-quality stock at a discount, JD presents opportunity. For those who can hold through near-term volatility, there is reason to buy this stock on the dip right now.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.