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Tesla versus NIO stock
Tesla (NASDAQ:TSLA) and NIO (NYSE:NIO) are electric vehicle producers. They’re both a bet on vehicle electrification. However, stock markets have a different view of these companies. Tesla stock has risen by almost 87% this year. So far, the stock has outperformed the markets by a big margin. NIO stock has fallen roughly 10% during this period. Incidentally, the optimism about growth in electric vehicle sales fueled a rally in Tesla stock. Investors have ignored NIO stock despite the electric vehicle frenzy.
Tesla stock rose after announcing a capital raise
The divergence in the fortunes was visible in the capital raise. Tesla stock soared after it announced an equity issuance. On the other hand, NIO stock fell after it raised capital through convertible notes. Both of the companies raised capital for different reasons, which explains why investors like Tesla stock, while they skipped NIO stock.
NIO stock fell after announcing convertible notes
NIO is raising capital to fund its cash burn. The company has raised concerns about its survival. The capital raise would help the company fund the cash burn. Simply put, NIO raised survival capital. The Chinese government also participated in the capital raise. Meanwhile, the municipal government of Hefei, Anhui Province is among the strategic investors. There hasn’t been retail participation in NIO’s capital raise. In contrast, Tesla issued ordinary shares on the stock market, which also see retail participation.
Elon Musk on Tesla’s growth
Tesla is getting ready for the next stage of growth. The company has been ramping up its operations in China. Tesla announced the next Gigafactory in Germany. During the first-quarter earnings call, CEO Elon Musk said that the company would announce the next Gigafactory in the US. The company already has two plants in the US. Meanwhile, NIO produces its cars in China.
Tesla ramps up Model Y production
Tesla is ramping up its Model Y production. Other models like the Cybertruck and Tesla Semi are also coming soon. By the end of this year, the company expects to monetize its Autopilot. Last year, NIO entered into a partnership with Mobileye for autonomous driving vehicles.
There are other growth pursuits for Tesla like the Robotaxi and Network App. During Tesla’s first-quarter earnings call Musk said that he expects Robotaxi and Network App in some markets as soon as the next year.
While keeping up with timelines hasn’t been a strength for Tesla or Musk, they give tight deadlines. However, over the last few quarters, the company has kept several commitments before the self-imposed deadline. China Gigafactory and the Model Y launch are two perfect examples.
NIO’s target market in electric vehicles
While Tesla focuses on mass-market vehicles like the Model 3 and Model Y, NIO’s focus is still on high-end electric cars. As a result, the company’s target market is even smaller. The electric vehicle market is still a niche segment. Initially, Tesla also focused on the high-end market with its Model S and Model Y. The company’s most successful product has been the mass-market Model 3.
Tesla’s target market in electric vehicles
Now, buying Tesla stock is virtually a bet on the global electric vehicle market. The company sells its cars across the world. Gradually, Tesla has been entering new markets. Tesla’s target market is much wider than NIO’s. The company’s product portfolio will look like a mainstream automaker soon after it starts delivering the Cybertruck and the Semi. Tesla is also a bet on the future of autonomous driving. The company has a competitive lead in batteries and autonomous technology. The company also has solar and energy storage in its portfolio.
Currently, these products don’t contribute much to Tesla’s earnings. Musk expects the energy segment to be equivalent to the company’s automotive business over the long term. Overall, Tesla is a bet on sustainable energy, electric vehicles, and autonomous driving.
NIO: A bet on high-end electric cars and China’s bailout
NIO is mainly a bet on China’s high-end electric vehicle market. The company has other ventures as well including battery swapping technology and autonomous driving. Support from the Chinese government could work in NIO’s favor. The country sees electrical vehicles as a strategic industry. The strategic investment from Hefei Municipal government is also seen in the same light.
NIO’s valuation
From a valuation standpoint, Tesla has a market capitalization of $145 billion and an enterprise value of $152 billion. The company is valued at a PE ratio of 56x its 2022 expected earnings. Notably, the company’s market cap is more than Volkswagen—the world’s largest automotive company. NIO’s market capitalization is only about $3.9 billion. Analysts expect the company to post losses in 2022 as well. Currently, NIO has posted negative gross margins. The company expects to post double-digit positive gross margins by the end of the year.
Overall, Tesla looks like a better play on the global vehicle electrification story. However, the company’s valuation appears to be on the higher side. Even Musk said that the stock was overvalued last week. NIO is a play on survival backed by the Chinese government.