This week has been a busy one for electric vehicle (EV) stocks. Yesterday, China’s EV manufacturer NIO (NIO) released its Q3 earnings and on Monday evening it was reported that Tesla (TSLA) will be added to the S&P 500 Index. While both these stocks have crushed market returns in 2020, let’s take a look at which one is a better buy today.
NIO Q3 beats revenue and earnings estimates
In the third quarter of 2020, NIO reported sales of $666.6 million, above analyst estimates of $655 million. Comparatively, its loss per share was $0.12, above consensus estimates of a loss of $0.17 per share. However, as of Wednesday’s market open, shares of NIO are trading down more than 6%t.
The company delivered 12,206 vehicles in Q3 which was 154% higher than 4,799 vehicles in the prior-year period and 18% higher than 10,331 vehicles in Q2 of 2020. During the earnings call, CEO William Bin Li said, “In view of the growing market demand for our competitive products, we are motivated to continuously elevate the production capacity to the next level. We expect to deliver 16,500 to 17,000 vehicles in the coming fourth quarter.”
NIO forecasts revenue between $922 million and $948 million in Q4, compared to Wall Street analysts’ forecasts of $806 million. This means sales are forecast to rise 127% year-over-year given the company’s midpoint guidance for Q4.
NIO stock has been one of the top performers in 2020. After it narrowly escaped bankruptcy earlier this year, the stock has gained a staggering 1,300% year-to-date. However, its stellar run has meant NIO is valued at a market cap of $63 billion, indicating a forward price to sales multiple of 27.5x which is lofty.
Further, NIO is also unprofitable and needs to improve the bottom-line at a fast pace to gain investor confidence. The stock remains vulnerable in a broader market sell-off and analysts tracking the firm have a 12-month average target price of $23.3 which is 50% below its current trading price.
Tesla stock has gained 400% in 2020
Shares of Tesla are up over 400% this year and it gained 8.2% on November 17 on news that it will now be part of the S&P 500 Index. The largest EV manufacturer in the world joined the index after it reported five consecutive quarters of positive net income. With a market cap nearing $420 billion, Tesla will be one of the biggest companies on the S&P 500.
While this news provided a temporary boost to an already expensive stock, investors should continue to focus on Tesla’s underlying business and its fundamentals. TSLA stock is trading at a forward price to sales multiple of 13.6x and a price to earnings ratio of 192x.
We can see Tesla is trading at a lower valuation compared to NIO and is also reporting consistent profits. Further, its leadership position and strong balance sheet make it a better pick for long-term investors.
In Q3, Tesla delivered 139,300 cars (up 43% year-over-year) and continues to have a massive advantage over peer automobile companies. The shift to EVs is bound to happen sooner rather than later and Tesla is at the forefront of this disruption. It has an integrated supply chain and deep expertise when it comes to manufacturing EVs.
Tesla’s sales in Q3 were up 39% at $8.8 million and it might deliver close to 500,000 vehicles in 2020. Yes, Tesla’s market cap is bigger than five of the world’s largest automakers combined. But the massive potential for EVs cannot be discounted by investors.
The final takeaway
China is the largest EV market in the world which means NIO is well poised to grow the top line at a fast clip in the upcoming decade. Alternatively, Tesla also stands to benefit from the steady transition towards EVs at the global level.
The two companies are part of the premium segment and will be able to reduce costs and benefit from economies of scale which in turn will boost demand in the upcoming decade. Though NIO is growing at a faster pace, Tesla’s lower valuation and profitability make it a better bet right now.
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NIO shares were trading at $44.70 per share on Wednesday morning, down $1.89 (-4.06%). Year-to-date, NIO has gained 1,011.94%, versus a 13.60% 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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