Production disruptions and challenging economic conditions amid the pandemic have impacted the auto industry. But McKinsey notes that the electric vehicles or EV market has been surprisingly resilient in some countries. The consulting firm expects the EV market to recover and grow more strongly in China and Europe than in the US.
Recently, Reuters reported that China’s State Council estimates sales of NEV (or New Energy Vehicles), which include battery electric, plug-in hybrid and hydrogen fuel-cell vehicles, to account for 20% of overall new car sales by 2025 in the country (the largest EV market presently) from just 5% now.
Keeping in mind these interesting trends in the EV market, we will use the TipRanks Stock Comparison tool to compare Tesla and Nio and see which stock offers a more compelling investment opportunity.
No other automaker gets the kind of coverage that Elon Musk’s Tesla gets from analysts and investors alike. Even during these challenging times, the EV market leader managed to impress its investors by delivering profits for five consecutive quarters. In fact, Musk called Tesla’s 3Q performance the “best quarter in history.”
Tesla’s 3Q revenue surged 39.2% Y/Y to $8.77 billion driven by a 44% rise in total deliveries to 139,593 vehicles. The company bounced back strongly following production disruptions due to the pandemic. Deliveries for the more affordable Model 3 sedan and Model Y crossover increased 56% Y/Y to 124,318 while deliveries of Model S and Model X declined 13% to 15,275. Overall, Tesla’s 3Q adjusted EPS surged 105% to $0.76 on strong top-line and margin expansion and its free cash flow jumped 276% to $1.4 billion.
Following the earnings release, Robert W. Baird analyst Ben Kallo upgraded Tesla to Buy from Hold and raised the price target to $488 from $450. The analyst acknowledged that he was too early to downgrade the stock in January. He also stated that Tesla’s competitive moat over peers is substantial and believes the stock is a “must own” for those looking for exposure to ESG (Environmental, Social, and Governance), sustainability, and disruptive technology.
Nonetheless, Tesla critics believe that the automaker has been profitable in recent quarters due to the inclusion of increased environmental regulatory credits. Tesla gets credits from state regulators for the production of zero-emission vehicles. Other automakers purchase such credits from Tesla to comply with emission regulations. In 3Q, Tesla’s revenue from regulatory credits increased 196% Y/Y to $397 million.
Also, the company has cut its vehicle prices multiple times this year to stay competitive, especially in markets like China and certain analysts are concerned about the impact of such price cuts on margins over the long-term. However, it is notable that Tesla’s automotive gross margin (even after excluding tax credits) expanded to 23.7% in 3Q20 compared to 20.8% in 3Q19.
Meanwhile, Tesla continues to aim for 500,000 deliveries this year despite pandemic-led production disruptions earlier this year. The company is investing heavily in capacity expansion at its Shanghai, China factory and is building new factories at Berlin, Germany and Austin, Texas. (See TSLA stock analysis on TipRanks)
The company also sees huge growth potential for its energy generation and storage business. Revenue from this business grew 44% to $579 million in 3Q but accounted for only 6.6% of Tesla’s overall top-line.
Tesla shares have risen by a staggering 403% this year. Which is why the average analyst price target of $379.26 indicates a possible downside of 9.9% in the months ahead. The Street is currently sidelined on the Stock with a Hold analyst consensus that breaks down into 9 Buys, 9 Holds and 9 Sells.
Nio has emerged as a prominent player in the premium EV space in China. The company currently sells a 7-seater electric SUV ES8 and its variant the 6-seater ES8, a 5-seater electric SUV ES6 and the 5-seater electric coupe SUV EC6, for which the company started deliveries in September.
Recently, J.P. Morgan analyst Nick Lai upgraded Nio to Buy from Hold and raised his price target to $40 from $14 as he views the company as a long term winner in the China premium EV space. He expects Nio to command ~30% of the premium passenger EV market or reach 334,000 units by 2025.
Nio shares have been rising this week on multiple favorable updates. On Nov. 4, Nio shares surged 6% as Citigroup analyst Jeff Chung raised his price target to a Street-high of $46.40 from $33.20. The analyst has a bullish outlook for China’s NEV sector and believes that the company has a better product cycle in 2021.
Chung reiterated a Buy rating for Nio based on “(1) very strong order backlog (1-5-1.8 month level) with high margin visibility; (2) 3Q20E gross processing margin likely to reach 13-16% level, followed by 4Q20E gross processing margin at 22-25% level; (3) increase in market share; (4) battery cost reduction; and (5) policy tailwind related to exports.”
Shares also rose following unconfirmed media reports that Nio is entering the European market with the launch of its ES8 and ES6 models next year. And earlier this week Nio provided a business update, which indicated that the company’s EV deliveries doubled Y/Y to 5,055 in October. This brings Nio’s total year-to-date deliveries in 2020 to 31,430, reflecting a 111.4% growth.
All eyes are set on Nio’s upcoming 3Q results scheduled on Nov. 17. Last month, the company reported that its vehicle deliveries surged 154.3% Y/Y to 12,206 in 3Q. (See NIO stock analysis on TipRanks)
With shares rising by an unbelievable 838% year-to-date, the average analyst price target of $25.69 indicates a downside potential of about 32% in the coming months. The Street is cautiously optimistic on Nio. A Moderate Buy analyst consensus for the stock is based on 6 Buys versus 3 Holds and 1 Sell.
Both Tesla and Nio shares have already skyrocketed so far this year. As a result the Street does not see further upside in either of these EV makers in the coming months. Tesla has a strong business model and the technology to capture further market share in the EV space and energy market in the years ahead. But, right now the analyst consensus indicates that the Street has a better outlook on Nio based on its rapid growth and its ability to further capture market share in the lucrative China premium EV space.
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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