While the stock market flopped to start 2021, shares of premium Chinese electric vehicle maker NioÂ (NYSE:NIO) did not. As of this writing, the S&P 500 is off about 2% in the first trading day of the New Year, while NIO stock is up about 10%.
Why the surge in NIO stock?
Because the EV maker reported December delivery numbers over the weekend that were simply outstanding. The headline numbers: Deliveries rose 121% year-over-year in the last month of 2020, marking nine consecutive months of triple-digit delivery volume growth for NIO against the backdrop of a world-stopping pandemic.
Thatâ€™s impressive. And the big rally in NIO stock over the past year (shares are up more than 1,000%) speaks to this reality.
But the more impressive part is that the NIO growth story is just getting started, and NIO stock has a long runway ahead before it is tapped out. So, buy NIO stock while this growth narrative is still in the â€œramp upâ€ mode.
Hereâ€™s a deeper look.
Nio Stock: Strong Momentum Today
Thereâ€™s no denying that NIO has tremendous operational momentum today.
The Covid-19 pandemic negatively impacted the company in the first quarter of 2020. But, ever since then, the EV maker has been absolutely on fire. In April, NIOâ€™s delivery trend reversed course, with volumes rising 181% year-over-year as Chinaâ€™s economy started to rebound from the pandemic and the government ramped up EV support.
That was only the beginning.
NIO rattled off 216% delivery volume growth in May, 179% growth in June, 324% growth in July â€” so on and so forth, all the way to December, creating a stretch of nine straight months of 100%-plus delivery growth.
Why the huge growth surge?
Outside of the fact that China is aggressively supporting EV adoption through huge subsidies, NIO has â€” through its sleek car designs, top-performance vehicles, swanky marketing campaigns and exclusive branding â€” cemented itself as the de facto leader in Chinaâ€™s booming premium EV category. Plus, NIO is pioneering a novel Battery-as-a-Service model that allows NIO drivers to rent car batteries (not own them), which significantly reduces the cost of the vehicles.
In other words, NIO is selling the coolest, highest-performance luxury EVs in China at blockbuster prices and at a time when all drivers in China are going electric. Itâ€™s no wonder the company is rattling off such huge growth rates, or that NIO stock is flying high.
Thatâ€™s the good news.
The better news? This growth story is the top of the first inning.
Long Runway Ahead
NIO is growing so quickly because the company is a leader in the booming Chinese EV market.Â It reasons, then, that so long as NIO remains a leader in this market and so long as this market continues to boom, NIO will remain in hypergrowth mode.
Indeed, both of those things will remain true for a lot longer.
Despite enormous growth over the past few years, Chinaâ€™s EV market represents just about 5% of total car sales in the country today. Thanks to robust government support and a huge supply of EVs in the market, most experts and industry analysts peg that number rising to somewhere around 20% by 2025, and 50% or higher by the 2030s. At the same time, Chinaâ€™s auto market should continue to grow on the back of secular urbanization and population growth trends.
Putting it all together, Chinaâ€™s EV market will grow by more than 10X over the next decade or so. Thatâ€™s huge growth.
Meanwhile, NIO is an established first-mover in this space with huge competitive advantages on the battery tech and branding fronts. The company is very much like the Tesla (NASDAQ:TSLA) of China. Just as Tesla has leveraged its technical and brand advantages to remains the â€œtop dogâ€ in EVs for several years, NIO will do the same in Chinaâ€™s EV market for several years, too.
It also helps that NIO â€” much like Tesla â€” continues to launch about one new car per year. The newest car, a NIO sedan, will be unveiled this week at NIO Day.
Connecting the dots, NIO projects as a premium leader in a market thatâ€™s set to explode by more than 10X over the next decade. That means NIO will remain in hypergrowth mode throughout the 2020s.
While NIO is in hypergrowth mode, NIO stock will keep pushing higher.
Pathway to $100
My numbers say that NIO stock has a visible pathway to prices above $100.
Those numbers are based on a few major assumptions, including:
- Chinaâ€™s electric vehicle market closes in on 45% auto penetration by 2030.
- NIO grabs about 8% market share in China, up from ~3% today, representing dominant share in the luxury market and small share in the non-luxury market.
- NIO sells internationally, too, and grabs about 4% EV market share outside of China.
- NIOâ€™s gross margins pan out around 25%, with the opex rate hovering around 10%, for operating margins of 15%.
On those major assumptions, I see NIO doing about $6 in earnings per share by 2030 (after factoring in dilution). Based on a 20X forward earnings multiple, that implies a long-term price target for NIO stock of $120.
Bottom Line on NIO Stock
NIO is a long-term winner at the epicenter of one of the biggest megatrends of our time. Strong December delivery numbers â€” on the heels of eight straight months of strong delivery numbers â€” simply underscore that NIOâ€™s growth potential is starting to come to life.
As all this growth potential continues to come to life over the next few years, NIO stock will keep pushing higher.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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