To The Moon

NIO Inc.($NIO Inc.(NIO.SI)$ – also called Shanghai Weilai Automobile Co., Ltd. in its motherland China – is an electric vehicle (EV) carmaker that has long held global investor interest since May 2017 when the the company's flagship EP9 became the fastest car around Germany’s punishing Nürburgring Nordschleife after beating the then-reigning champion – the Lamborghini Huracan Performante – by almost seven seconds. 

The points in favour of the company include its high operational achievements via its joint venture with state-owned Jianghuai Automobile Group Co., Ltd. (which operates a plant in Hifei for the company), its leadership's clearly-defined and ambitious plans for growth as well as its steady focus in building out infrastructure for its offering.

Possibly due to concerns over its U.S.-listed American Depositary Share (ADS) delisting in light of growing regulatory pressure as well as growing pressure to list in Asia, the company has gone on to successfully list in both the Hong Kong Stock Exchange (HKSE) earlier this year as well as the Singapore Stock Exchange (SGX) four days ago. The SGX listing offers a layer of ease for investors in the vibrant ASEAN belt. 

However, given the economic scenario as well as the company's performance, the overall outlook for the company would do well with a nuanced consideration. 

Fiscal and Ratio Trends

The company's most recent earnings release was the annual report at the end of April this year, which is quite handy in terms of studying yearly trends:

Source: NIO Financial Statements

The study of trends reveal:

1. While growth in revenue holds steady year-on-year, growth in total cost of sales and operating expenses haven't held steady. In fact, they have increased.
2. While gross profit - signifying earning efficiency from the production and sale of goods and services - has surged spectacularly, net income - signifying overall profitability - continues to be depressed (albeit improving)

An interesting pattern in recent commentary regarding the company's offering has been its positioning versus Tesla, Inc (TSLA): various publications have indicated that this company could be a "Tesla Killer". Be that as it may, a comparison versus Tesla isn't completely out of the question: in China (and over the new few years in Western Europe), both companies' vehicles are increasingly being positioned as rivals in terms of addressable consumer segment.

A ratio analysis of both companies' stock performance, however, don't show any significant disparities beyond a general "ratio cool-off" since the end of 2021:

Now, as mentioned in prior articles, data providers typically don't provide ratios that are too high or too low on account of such information being meaningless in terms of actionable insight. This is certainly true for NIO's PE Ratio (PE). In the Price to Sales (PS) and Price to Book (PB) Ratios, both tickers show roughly analogous drops.

However, not all sources decline to furnish data on "meaningless" ratios. For instance, Zacks' shows that - unlike with Tesla - the company has had highly adverse PE valuations (and continues to be so).

Given that prices can never be negative, this is a strong indicator that the company has witnessed a significant rally in prices even during its low-earning periods. This isn't surprising, given the trends seen in 2019 through 2021 - which were enough to cause a rally in a highly overvalued market.

Another investment tracking service has a rather eclectic selection of companies that it considers to be comparators for the stock, albeit with slightly different terminology. Relative to this selection, the company's PE Ratio is listed as being "at loss" - similar to other "pure-play" EV newcomers Lucid and Rivian:

Source: GuruFocus

Given the fact that the company had announced a new brand for mass-market EVs in its Q2 update to compete with VW and Toyota in China, it can be expected that the company's expenses will continue to impose a strain on its profitability in subsequent years. In fact, consensus estimates - as per Nasdaq - posits the ratio to worsen in 2023 followed by a turnaround in the subsequent year:

Source: Nasdaq

Summary and Recommendation

Given the facts presented and strong industry consensus, NIO shows strong potential to be a "growth stock" with a two-year horizon. The company's product offering is attractive and its breadth of addressable consumer segments is likely to improve with the inclusion of a "mass-market" EV roster. The quest for the latter, however, will weigh down profitability for the next few years given the capital-intensive investments necessary in this industry but there's no indication at present that that the company will fail in its endeavour. It bears noting that competition in its primary market - China - will be cut-throat, to say the least.

As highlighted in the article on the biotech sector , current times aren't very conducive for ever-rising price trajectories in growth stocks. Thus, this stock would likely be quite attractive to those investors who are willing to wait a couple of years to see a substantial and sustained positive portfolio impact. 

For others with access to exchange-traded products (ETPs), there are a variety of leveraged/leveraged inverse products to capitalize on the stock's current price discovery patterns. These products have already shown very strong performance as compared to the stock in this year alone. 

For instance, lets consider the $LS -3X SHORT NIO ETP(SNIO.UK)$ which offers a -3X exposure on a daily-rebalanced basis to the stock's trajectory. Over the month of January, holding the stock would have caused a loss of nearly 27% while the ETP delivered over 58% in gains:

Source: Created by the author using data from Yahoo! and Leverage Shares

Similarly, across the month of April, SNIO delivered over 79% in gains while the stock lost nearly 24%:

Source: Created by the author using data from Yahoo! and Leverage Shares

Now, the month of February is an interesting study: while the stock declined by over 8%, the ETP declined by a little under 2%: 

Source: Created by the author using data from Yahoo! and Leverage Shares

An earlier article  had described how a investor holding Tesla stock could work out a "value preservation" strategy using ETPs. The opposite of SNIO is the 3X ETP ($LS 3X LONG NIO ETP(3NIO.UK)$) which can be utilized to build a similar value preservation/boosting strategy, which could be either rule-based or driven by the investor's intuition about the markets. 

Single-stock ETPs have a similar structure to "Daily Leverage Certificates" (DLCs) that have long been available to investors in Singapore, albeit with a different fee structure. The issuer for SNIO and NIO3 had recently announced a "fee holiday" for SNIO:

Source: leverageshares.com

While the product's fees are "baked" into the product (i.e. investors don't have pay fees separately for purchasing this product since it's already acounted for in the quoted price) and are typically very low (e.g. around the 1% mark for Leverage Shares product on an annual basis), the "fee holiday" is money on the table which is there for the taking. 

There are many ways to go about buying exposure to a stock's trajectory. When it comes to "high conviction" stocks such as NIO, products such as ETPs offer insurance to the mid- to long-term investor's existing stock holdings or become a solid portfolio-boosting strategy for the opportunitistic investor. Both types of investors, however, have to bear in mind that investment into ETPs require both discipline and active management: inter-day price trajectories determine the payoff structure as well as the risk profile.