TipRanksFri, December 4, 2020, 2:22 AM EST·6 min read
Recent numbers reported by Nio, Xpeng and Tesla clearly indicate the growing demand for electric vehicles, driven by technological advances and favorable sustainability policies. EV adoption is increasing and Goldman Sachs now expects EVs to account for 18% of global new light vehicle sales in 2030 and speed up to 29% in 2035.
Goldman Sachs explains that EV penetration is accelerating as battery prices are falling faster than expected, which improves the economics of owning an EV. Also, it cites the recent increase in regulatory proposals from some jurisdictions to limit or ban the sale of new internal combustion engine vehicles entirely in 10-20 years as another catalyst for EV sales.
So, with a favorable demand backdrop, we will pit EV leader Tesla against its nemesis, Nio, and use the TipRanks Stock Comparison tool to select the more attractive stock.
China-based premium EV maker Nio is racing in the world’s largest EV market with its 7-seater and 6-seater electric SUV ES8, 5-seater electric SUV ES6 and the recently launched 5-seater electric coupe SUV EC6. Nio investors have hit the jackpot as shares have gained about 1,028% year-to-date.
So, what has fueled this unbelievable rally? Well, the reasons include a strong third quarter, bullish outlook on China’s NEV (New Energy Vehicles) market and media reports about Nio entering the European market with the launch of its ES8 and ES6 models in 2021.
Adding to the positive sentiment, Nio this week reported its November deliveries, which more than doubled year-over-year to 5,291 vehicles. This brings the total deliveries so far this year to 36,721, reflecting a 111% year-over-year increase. (See NIO stock analysis on TipRanks)
The demand that Nio is experiencing is so strong that the company has now decided to accelerate its capacity expansion in December to keep up with the rising orders. Last month, Nio’s CEO William Bin Li stated, “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’s improving prospects prompted Goldman Sachs analyst Fei Fang to upgrade the stock to Hold from Sell and boost the price target to $59 from $7.70. In a note to investors, Fang stated, “In hindsight, we underestimated the benefits to Nio from: (1) powertrain breakthroughs, particularly with the cell-to-pack/blade large cell technologies; (2) the introduction of Nio’s battery as a service (BaaS) program, which has significantly expanded Nio’s addressable market; and (3) regulatory incentives that turned around EV market demand from an ongoing decline. Combined, all of these factors have provided significant tailwinds to Nio’s sale volumes.”
On Wednesday, UBS analyst Paul Gong also raised his price target on NIO to $55 from $16.30, while maintaining a Hold rating.
Looking ahead, there is a lot of buzz surrounding the company’s annual event, “Nio Day”, slated for January, where the EV maker is expected to launch its first sedan.
Currently, the Street has a cautiously optimistic outlook on Nio, with a Moderate Buy analyst consensus that breaks down into 7 Buys and 4 Holds. Given the staggering year-to-date rise, the average price target of $49.01 reflects an upside potential of 8.1% in the months ahead.
Tesla is firing on all cylinders and the EV pioneer is taking the right measures to sustain its global leadership. Following pandemic-led disruptions earlier this year, Tesla bounced back in remarkable fashion, with a 44% rise in deliveries to 139,593 in the third quarter—CEO Elon Musk called it the “best quarter in history.”
Tesla’s long-awaited inclusion in the S&P 500 and five consecutive profitable quarters have led to a meteoric year-to-date rise of 609% in its stock. The company is now focusing on cutting its costs and improving its profitability while investing billions of dollars in capacity expansion at the Shanghai factory and new factories in Berlin, Germany and Austin, Texas. (See TSLA stock analysis on TipRanks)
Emphasizing the focus on the bottom line, Musk stated in an email (which Electrek had access to) to employees, “Investors are giving us a lot of credit for future profitability, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a souffle under a sledgehammer!”
Improving its profitability is even more vital for Tesla as it intends to make its EVs more affordable at a time when auto giants like Ford and General Motors are ramping up their EV investments and China-based EV makers are coming after its market share.
Meanwhile, Tesla is gearing up to expand its market share in the huge Chinese EV market. The company was already selling its Model 3 electric cars in China and has now been granted permission to sell its Shanghai-made Model Y SUVs in the region.
On Dec. 2, Goldman Sachs flipped from the sidelines to a Tesla bull, with a Street-high price target of $780 (up from $455). Writing for Goldman Sachs, Mark Delaney highlighted the accelerating EV adoption and stated, “Importantly, we expect that Tesla’s integrated model (including its coupling of custom hardware and software, platform approach with significant parts overlap between key products like the Model 3 and Y, and its ability to offer a full ecosystem of products for consumers including solar, storage, and convenient access to fast charging) will help it to sustain a leadership position in the EV market.”
“If Tesla sustains its mid to high 20% range share of the EV market, then it could reach 15 mn units by 2040 (and about 20 mn under our upside-case EV market adoption scenario),” added Delaney.
Additionally, Delaney believes that Tesla’s energy and full self-driving software businesses could be more valuable than he previously anticipated. The analyst also expects the company’s margins to expand due to a favorable mix shift to Model Y.
The Street, meanwhile, has a Hold analyst consensus on Tesla with 10 Buys, 8 Holds and 7 Sells. Given the staggering rise in the shares, the average price target of $403.24 indicates a possible downside of 32% from current levels.
Tesla’s technology, innovations, leadership in the EV space and improving profitability make it an attractive long-term play. However, the Street is essentially sidelined on the stock mainly due to its sky-high valuation, and as several critics point out—the role of emission credits in making Tesla profitable in recent quarters. The Street currently has a more favorable near-term outlook on Nio stock. That said, investors need to tread carefully due to lofty valuations, especially for a company that is not generating a profit yet.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment