Electric vehicle (EV) stocks have been a standout performer of 2020. Year to date, the S&P 500 is up 10.5%, while the KraneShares Electric Vehicle and Future Mobility ETF (KARS) is up 43%. This outperformance has continued in recent weeks despite many growth stocks getting clobbered last week. 

Since late September, the S&P 500 has been range-bound, while KARS is carving out higher highs and lower lows.

Even more impressive is the performance of leading stocks, like NIO (NIO) and Tesla (TSLA), which are up 985% and 364% YTD, respectively. Of course, these returns have attracted considerable attention from investors.

This morning, Tesla is set to open 13% higher on the news of its inclusion into the S&P 500, which many believe could drive institutional money into the stock. This puts the stock at about 10% below its all-time highs, set in September. NIO made an all-time high on Friday, however, the stock is down about 20% from these levels on a short-seller’s report that struck a skeptical tone about the company’s ability to justify its valuation.  

NIO and TSLA’s success is a testament to their founders and management teams’ vision and execution. However, some more sector-wide factors are also contributing to their strength – expected exponential growth in the EV market over the coming years, increased government support to reduce pollution by supporting EVs, and technological improvements in batteries and electric engines which is shrinking the gap between EVs and gas-powered vehicles.

EV Earnings

These positive developments for the EV sector are now leading to increased interest in smaller companies in the sector like Li Auto (LI) and Xpeng (XPEV) who could potentially make similar moves like NIO and TSLA if they can execute their visions and gain traction with customers. 

For investors, it can be challenging to evaluate the prospects of these companies given the number of uncertainties. Traditional valuation tools are less relevant. 

In certain contexts, these can be very useful in limiting risk and finding opportunities, however, EV companies are focused on growth and scaling production rather than maximizing profits. Further, they already have reached healthy valuations given investors’ enthusiasm for EV stocks.  

In many ways, this is more akin to venture investing, since these companies are being valued on more intangible factors like the quality of the management team, growth in total addressable market (TAM), assumptions about expected improvements in electric engines, and determining how much support the government will provide.

Therefore, investors need to pay close attention to these companies’ earnings reports to gauge whether they are on the right track to meet these objectives, as it provides a more tangible insight into operations.

Later today, NIO will be reporting its third-quarter results. The stock has more than tripled since its last report in which it topped expectations in terms of deliveries and gross margins. Last week, both Xpeng (XPEV) and Li Auto (LI) posted results. Let’s take a look at each to get some insight into NIO’s upcoming report.

Xpeng (XPEV)

XPEV jumped 33% last week after its earnings report topped expectations. The major highlights in the report were revenues quadrupling, deliveries increasing by 265%, and gross margins becoming positive. All of these are positive signs that the company is scaling production, lowering per-unit costs, and gaining traction with customers.

The company lost money in the quarter, as it continues to invest in growth. Currently, it’s constructing a second manufacturing facility with the Chinese government helping to fund this growth. Investors are optimistic about EVs in China due to the government’s aggressive support of companies and subsidies on the consumer side. Further, China has also heavily invested in charging infrastructure as well as creating universal standards for batteries. 

XPEV’s cars have been compared to TSLA in terms of its design. However, one difference is that XPEV is focused more on luxury and comfort rather than performance. It believes that due to the nature of traffic in China and road conditions, this is a better angle to win customers.

The early returns of that strategy are promising as indicated by its earnings report and stock price. Since its IPO in late-August, the stock is up 91%. It has a $34 billion market cap and revenue of $400 million.

Li Auto (LI)

Rather than competing directly with larger EV companies, LI is targeting a more, underserved market – rural China. It’s building large SUVs with an electrical engine that also has a gas-powered generator. 

There’s a lack of charging infrastructure in rural areas, so LI’s EVs are a better fit. Further, the vehicles are heavy-duty and can handle more laborious tasks that would be required for farming or construction. 

So far, this approach is paying dividends. In its last quarter, LI’s net loss narrowed from $51 million to $47 million. Revenue increased by 29% to $369.8 million, topping expectations of $348 million. Gross margins increased from 13% to 19%. Vehicle deliveries also increased to 12,000 for the quarter. 

NIO (NIO)

Both LI and XPEV’s earnings reports are positive indications for NIO. Both demonstrated continued growth, success in increasing production, and lowering costs. It’s a sign that the Chinese EV is continuing to grow. However, investors need to ask themselves, how much of this news is priced into the stock?

Currently, NIO has a $67 billion valuation. In its last quarter, NIO made 10,400 vehicle deliveries. In contrast, in its last quarter, Ford (F) delivered around 1.2 million vehicles and has a $33 billion market cap. Additionally, competition in the Chinese market is going to heat up as Tesla is building its own factory in China. There are several startups expected to introduce their products in the coming months. Additionally, legacy car companies are also going to compete and win market share as well.

While these are longer-term concerns, in the near-term, NIO is likely to do well if it can demonstrate like XPEV and LI that production and gross margins are moving in the right direction. 

The POWR Ratings are bullish on the stock, as it has a Buy rating. It has an “A” for Trade Grade and Peer Grade with a “B” for Industry Rank. Among Chinese stocks, it’s ranked #3 out of 115.

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NIO shares were trading at $46.93 per share on Tuesday morning, up $1.35 (+2.96%). Year-to-date, NIO has gained 1,067.41%, versus a 13.35% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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