Shares of electric vehicle (EV) companies were among the top performers in 2020. Further, Chinese EV manufacturers crushed the broader market and touched record highs because investors were bullish on the rapidly expanding market for companies in this sector.
China is the largest electric vehicle market in the world and EV sales in the country in 2020 soared to one million. This figure is forecast to rise to five million by the end of 2025, according to the Chinese government. And one BloombergNEF report estimates EV sales in China will hit 10 million by 2030 and 20 million by 2040.
We think two EV manufacturers, NIO (NIO) and Li Auto (LI), are well positioned to capitalize on the consumer shift towards clean energy vehicles. The stocks of these companies have lost significant value this year due to a broader market sell-off and concerns over steep valuations, which have driven investors to buy quality growth stocks at lower multiples. Since January 1, NIO’s stock is down 26%, while Li Auto has lost 18% in market value.
Let’s evaluate which of the two names is the better buy right now.
The bullish case for NIO
In the fourth quarter of 2020, NIO’s sales more than doubled year over year to $1.03 billion. Its vehicle deliveries were up 110%, totaling 17,353 units. NIO managed to narrow its non-GAAP loss to $205 million or $0.15 per share compared with a net loss of $435 million in the prior-year period.
Wall Street expected NIO to report Q4 sales of $1.01 billion, and its loss per share was forecast at just $0.07. In Q1, NIO initially estimated to deliver 20,000 – 20,500 units. This would have meant a year-over-year growth of over 400%. It also estimated revenue of between $1.14 billion and $1.17 billion in the March quarter, up at least 438% versus to Q1 of 2020. Now, due to the shortage in the semiconductor space, it has lowered its shipment forecasts to 19,500 units.
NIO delivered 44,000 vehicles last year. The company continues to expand its product portfolio, which should be a key driver of its top-line growth in 2020 and beyond.
NIO is growing at a fast clip and continues to work towards improving its profit margins. It’s now valued at a market cap of $56.2 billion indicating a price to sales multiple of 10.8x, which is reasonable considering its growth rates.
Analysts forecast NIO will double its sales to $5.22 billion in 2021 and grow its top line by another 65% to $8.6 billion in 2022. They also expect its losses per share to narrow from $0.72 in 2020 to $0.1 in 2022.
The bullish case for Li Auto
Li Auto reported 5,379 Li One models sold in January, representing an increase of 356% year over year. However, the total was 13% lower than the 6,126 vehicles it delivered in December 2020. Since Li One was launched back in November 2019, its total vehicle deliveries were close to 40,000 as of January 2021.
In Q4, LI’s total sales rose 65% to $635.5 million. While its operating loss stood at $12 million, it generated a free cash flow of $245 million in Q4. For full-year 2020, LI’s sales totaled $1.45 billion, and its operating loss stood at $103 million.
In Q1, Li Auto predicts shipments of 10,500 – 11,500 vehicles, up 300% year over year. Its revenue growth is expected to be between $450 million and $494 million, up approximately 280% compared to Q1 of 2019.
Li Auto is valued at a market cap of $21.44 billion indicating a price to sales multiple of 7.4x. Analysts forecast Li Auto to double its sales to $2.89 billion in 2021 and to grow its top line by another 79% to $5.16 billion in 2022. They also expect its bottom-line to improve from a loss per share of $0.28 in 2020 to earnings per share of $0.18 in 2022.
What next for investors?
LI and NIO have multiple secular tailwinds that make them both solid long-term bets. As the EV market continues to develop in China, the country’s economic policies that include subsidies and regulatory credits will play an important role for manufacturers.
However, every fast-growing industry attracts competition, which suggests the EV may soon become crowded, resulting in a deceleration of revenue growth.
Analysts that cover LI have a 12-month average target price of $37, which is 56% above the current trading price. Coincidentally, NIO’s stock is also trading at a 56% discount to Wall Street target estimates.
If you need to choose one out of these two high-growth stocks, we believe Li Auto’s lower valuation and higher growth rates in 2022 make it a better buy.
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NIO shares were trading at $35.01 per share on Monday afternoon, down $1.12 (-3.10%). Year-to-date, NIO has declined -28.17%, versus a 6.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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