NIO: NIO vs. Nikola: Which Stock is a Better Buy?

Nikola Corporation (NKLA - Get Rating) and NIO Ltd. (NIO - Get Rating) are two relatively new electric vehicle (EV) manufacturing companies operating in the market. While NIO was listed in the NYSE in September 2018, NKLA became public on June 4^th, 2020. Despite being new players, these companies have already garnered significant investor attention, and are giving stiff competition to existing players in the EV market.

In terms of year-to-date performance, NIO is the clear winner with a 434.1% gain compared to NKLA’s negative return. But which stock is the better buy now? Let’s find out.

Business Structure and Latest Movements

NKLA raised $12 billion through its SPAC IPO on the NASDAQ stock exchange. Being dubbed “the Tesla of trucking,” it is one of the first companies to develop a pipeline of hydrogen-powered trucks. Blank check company Vector IQ acquired NKLA through a special purpose acquisition, following which NKLA became public. This allowed NKLA to raise $700 million through business combination and private investment in public equity (PIPE) from Fidelity Management, Value Act Spring Fund, and P. Schoenfeld Asset management LP.

In July NKLA announced a sale of 23.9 million shares following an exercise of a warrant. Also, in September, NKLA’s founder and CEO Trevor Milton announced he was stepping down, amid allegations of misleading investors by overstating the company’s progress.

On September 8^th, General Motors (GM) agreed to an 11% equity stake in NKLA for $2 billion but rumor has it these terms are up for renegotiation. This partnership would allow NKLA to use GM’s battery system and Hydrotec fuel cell technology for its truck projects.

NIO recently raised $1.3 billion through an American depository share offering, which is expected to contribute to the research and development of electric car ecosystems and automated technologies, as well as developing its global market presence. It also plans to buy back some of its shares from Hefei Investor Group, which previously bailed out the company with a $1.4 billion cash infusion.

NIO is the first company to launch a ‘battery as a service’ (BaaS) subscription model, allowing customers to purchase electric vehicles and battery packs separately. It is planning to launch its EVs in the European market by 2021. NIO aims to penetrate most important global markets across the world by 2023 – 2024, as announced by new CEO William Li.

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Recent Financial Results

NKLA second quarter results reflected the adverse impact of the coronavirus pandemic, as well as internal management issues. However, NKLA generated $36,000 in solar revenues in the second quarter that ended June 2020.

Currently, NKLA’s infrastructure is being constructed. It’s German manufacturing facility Iveco’s Ulm is expected to produce 10,000 units per year from the fourth quarter of 2021. NKLA is also building a production unit in Arizona, which is expected to deliver 30,000 trucks by the fourth quarter of 2021.

NIO, on the other hand, has a well-placed manufacturing and delivery system, and a dominating market share in China’s electric car market. It is currently planning to enter the European car market.

NIO’s vehicle sales and total revenues both increased 146.5% year-over-year to $493.40 million and $526.40 million, respectively, in the second quarter that ended June 2020. Gross profit of $44.30 million indicates significant improvement from the loss reported in the prior-year quarter.

NIO’s deliveries for the third quarter that ended September 2020 indicates 154.3% improvement year-over-year to 12,206 vehicles. In the month of September alone, NIO delivered 4,708 vehicles, representing a 133.2% rise from the year-ago value.

Though NKLA has a promising future, the internal management problems and misleading information makes it a risky investment now. Thus, NIO has an edge over NKLA here, with the former’s demonstrated impressive performance.

Past and Expected Financial Performance

NKLA’s revenue increased 178.6% year-over-year, while NIO’s revenue grew 21.5% from the same period last year. However, NKLA’s revenue growth comes from its solar installation projects, which the company plans on discontinuing.

The market expects NKLA’s revenues to increase 56,257.1% next year to $78.9 million, as the company’s pipeline EV trucks are expected to hit the market in 2021. On the other hand, the market expects NIO’s revenue to grow 75.4% in 2021.

Profitability

NIO’s trailing 12-month revenue is 3136.36 times what NKLA generates. However, NKLA is more profitable with a gross margin of 41.6%, compared to NIO’s negative value.

Valuation

In terms of trailing 12-month Price/Sales, NKLA is currently trading at 4140.36x, 257.3% more expensive than NIO, which is currently trading at 16.09x. NKLA is also more expensive than NIO in terms of EV/Sales ratio (19663.84x versus 22.02x).

Thus, NIO is the more affordable option.

POWR Ratings

NIO is rated “Strong Buy” in our proprietary POWR Ratings system, while NKLA is rated a “Sell.” Here’s how the four components of overall POWR Rating are graded for NIO and NKLA:

NIO has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. In the 115-stock China group, NIO is ranked #3.

NKLA holds an “F” for Trade Grade and Buy & Hold Grade, “D” for Peer Grade, and “B” for Industry Rank. It is currently ranked #20 out of 29 stocks in the Auto & Vehicle Manufacturers industry.

The Winner

Both NIO and NKLA are leading companies in the electric vehicle industry. However, NIO is actually a buy here, given its impressive past performance, growth momentum, and favorable earnings and revenue outlook. Though NKLA also has plenty of upside, especially in the next year, its internal management turmoil and potentially misleading speculatory information bleaks its actual growth potential.

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NIO shares were trading at $21.95 per share on Monday afternoon, up $0.48 (+2.24%). Year-to-date, NIO has gained 446.02%, versus a 11.11% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...