Investing in a high-growth industrial segment carries significant risks. Market dynamics are such that sectors with exciting growth prospects attract competition like bees to honey, and companies with considerable resources can deploy sufficient capital to gain great traction in new markets quickly. For example, Fitbit (FIT) was once a market leader in the wearables space. But several tech giants, including Apple (AAPL) and China’s Xiaomi, bundled into the sector, quickly impacting Fitbit’s top-line growth.
In the last year, companies in the electric vehicle (EV) sector crushed the broader markets as the transition towards clean energy vehicles gained pace globally. This transition will accelerate in the coming decade and has already attracted the attention of legacy manufacturers such as Volkswagen and BMW.
Nevertheless, two EV companies we think investors should analyze carefully in this disruptive segment are China-based manufacturers NIO (NIO) and XPeng (XPEV). Let’s analyze to see which stock is a better buy right now.
The bull case for NIO
NIO is often referred to as the Tesla (TSLA) of China, and for good reason. The company delivered a record 7,257 vehicles in March 2021 and more than 20,000 vehicles in the first quarter of 2021. While this is significantly lower than Tesla’s 184,000 quarterly figure, NIO generates most of its revenue from China. Its deliveries were up almost 100% year over year despite a shortage of automotive semiconductor chips that halted production for five days at NIO’s partner factory in Hefei.
China is the largest EV market in the world, which suggests that the sales and profit margins of NIO and peers are likely to widen at a rapid pace over the next decade. NIO has already delivered 100,000 vehicles to date.
NIO’s sales more than doubled in 2020 and this stellar growth translated into a stock return of more than 1,100% last year. But this year, EV stocks have been trailing the broader market and have lost momentum because investors are concerned about their steep valuations.
NIO stock is currently trading 41% below its record high and is valued at a market cap of $61 billion, indicating a forward price-to-sales multiple of 11.7x. Analysts tracking the stock expect NIO to increase its sales by 107% to $5.22 billion in 2021, while its revenue is forecasted to rise by 65% to $8.6 billion in 2022.
NIO might sell close to 100,000 vehicles this year and this figure could rise to 500,000 by 2025. These exciting growth prospects may explain why investors are bullish on NIO stock.
The bull case for XPeng
XPeng also more than doubled its vehicle deliveries in 2020 to 27,041. It recently introduced a sedan EV model, which is likely to drive future top-line growth. XPeng launched the P7 sports sedan at the start of 2020. The vehicle has surpassed 20,000 deliveries to date. In fact, it was China’s fastest EV vehicle to reach this landmark.
Earlier this month, XPeng launched its third production model, known as the P5 smart vehicle, which is equipped with LiDAR sensors. XPeng claims the P5 will be the first EV that will be mass-produced with automotive-grade LiDAR technology. LiDAR is a method for determining ranges (variable distance) by targeting an object with a laser and measuring the time for the reflected light to return to the receiver.
XPeng stock is currently valued at a market cap of $26 billion, indicating a forward price to sales multiple of 11.9x, which is similar to NIO. However, Xpeng is forecast to grow sales by 145.6% to $2.2 billion in 2021 and by 94% to $4.25 billion in 2022. These growth rates are significantly higher than NIO. XPeng stock is also down 54% from record highs, making it attractive to contrarian investors.
According to a report from BloombergNEF, EV sales in China crossed 1 million in 2020 and might touch 5 million by 2025, 10 million by 2030, and 20 million by 2040. NIO and Xpeng are poised to capitalize on this expanding, addressable market and currently account for an aggregate 7% market share of China’s EV market.
Both the companies also have sufficient liquidity to invest in growth initiatives. NIO ended 2020 with $6.5 billion in cash while XPeng’s cash balance stood at $5.4 billion.
However, given similar valuations, we believe that XPeng’s higher top-line growth rate and its targeted expansion in Europe make it a better buy currently.
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NIO shares were trading at $35.61 per share on Thursday afternoon, down $1.41 (-3.81%). Year-to-date, NIO has declined -26.94%, versus a 11.45% 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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