NIO: FCF-Positive EV Stock With Massive Growth (NYSE:NIO)

Chinese Electric Car Maker NIO Inc. Opens Trading On NYSE On Day Of Company"s IPO

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NIO Inc (NYSE:NIO) is a rare free cash flow (“FCF”) positive EV stock. In a world where Rivian (RIVN) barely made any deliveries in Q1 and Lucid (LCID) only made a few thousand, NIO is not only delivering cars, but even covering its cash costs.

This is extremely rare among small EV companies. The space is noted for large promises and small execution. The most noteworthy example of this is probably Nikola (NKLA), whose former CEO got hit with fraud charges for allegedly lying about the company‘s progress. The company itself had to pay out $125 million to defrauded investors.

That‘s not to say that the entire EV industry is the Wild West. Tesla (TSLA) is doing over 300,000 deliveries per quarter, and is also profitable. Likewise, Volkswagen (OTCPK:VWAGY) is profitable and is actually rather cheap. However, Tesla is very expensive and Volkswagen is not a pure play. For value investors looking for pure EV stocks, neither is a viable option.

NIO arguably is. Trading at 3.6 times sales and 6 times book value, it is not particularly pricey by EV standards. That‘s not to say that it‘s actually cheap – the 87 FCF multiple is pretty high, but it‘s not as high as Tesla‘s, and NIO has much faster growth than that company does.

So, there are many points in NIO‘s favour. Among the cheapest and fastest-growing of EV stocks, it looks like a bargain. And it may be. With that being said, I do not personally invest in the stock. I have nothing against the name, but I generally prefer to invest in stocks with positive earnings. There may come a point in the future when I take a position in NIO, but for now, I consider it a “hold,” a stock whose holders have a good thesis but whose fate is still highly uncertain.

Competitive Landscape

Before evaluating any stock‘s financials, you have to look at its competitive landscape. That is, the quality of the industry itself, and the company‘s position within it. With that information you can ascertain whether a positive revenue trend like NIO‘s can continue into the future.

EV manufacturing is without a doubt a high-growth industry. Facts and Factors estimates that EVs will grow at 24.5% CAGR to 2028. Other research agencies have similar forecasts. If such high growth forecasts seem overly rosy, you should note that EV sales grew at 43% in 2020, when the COVID-19 pandemic was in full swing. So, EV manufacturing is a resilient industry that should continue experiencing high growth going forward.

How does NIO stack up compared to its competitors in the industry?

In terms of deliveries, it is pretty much in the middle of the pack.

NIO delivered 25,000 cars in the fourth quarter. That‘s ahead of Lucid and Rivian but behind Tesla and VW. On an annualized basis, assuming no growth, NIO would deliver 100,000 cars per year. If the average revenue per car were $65,000, that would give us $6.5 billion a year in revenue. That lines up pretty well with fourth quarter‘s reported revenue of $1.55 billion.

So, we‘ve got NIO actually selling and delivering cars. That‘s a huge plus. The EV industry has acquired a bit of a reputation for not delivering on its promises. A number of EV startups have popped up in recent years that have taken customers‘ money but never delivered any cars. This phenomenon is explored in detail by tech reviewer Marques Brownlee. Brownlee lists at least half a dozen examples of startups – some of them publicly traded – that took customers‘ money several years ago, but still hadn‘t delivered their cars as of April 2022.

So, NIO is one of the more “legitimate” EV companies, without a doubt. Its revenue lines up with its delivery numbers, so it probably isn‘t taking customers‘ money and running. This suggests that NIO‘s production is running smoothly and that its management is operating in good faith. That alone gives reason to think that NIO will beat the competition on longevity.

At least, that‘s the case if we define “the competition” as NIO‘s fellow upstarts. If we include the larger EV players, then NIO has a long road to walk. Tesla is delivering nearly a million EVs a year, and is already in China – NIO‘s home turf. Volkswagen is delivering several hundred thousand cars a year, is strong in Europe, and wants to enter the Chinese market. It will take a while for NIO to catch up with these larger competitors.

Keep in mind the EV industry‘s growth, though. In such a high growth space, going up against larger incumbents doesn‘t mean you are at a disadvantage. This is a growing market where large gains can be made without having to take market share from somebody else. So, NIO‘s historically high growth can continue into the future.

A Free Cash Flow Compounder

Having looked at NIO‘s competitive position, it‘s now time to turn to its financials. In a previous article, I took a general look at NIO‘s earnings and balance sheet, this time I will take a deep dive specifically on cash flows.

NIO Inc achieved positive operating cash flow (“CFO”) in 2020. For the year, the company posted $298 million in CFO. In the two prior years, CFO came in at:

  • $-1.25 billion (2019).

  • $-1.1 billion (2018).

So, we saw a significant improvement in operating cash flow compared to 2019. Seeking Alpha Quant further reports positive free cash flow for the year, at $211 million.

So we‘ve got positive free cash flow and positive operating cash flow in the picture. Pretty good for a 7 year old company. On the other hand, NIO is pretty expensive when its market cap is compared to its cash flows. The FCF multiple is 87, which is technically pretty high. However, you need to take growth into account when looking at multiples for early stage companies. NIO‘s revenue growth rate for 2021 was 128%. It was 122% for the trailing 12 month period. That‘s much faster than even Tesla, which is a notoriously fast-growing company. So, a high multiple is arguably justified here.

That‘s not to say that NIO‘s cash flow picture is across-the-board awesome. If you take a look at the cash flows from financing, for example, you‘ll notice that an enormous amount of cash is being generated by issuing new stock. Cash from financing activities was $6.3 billion in 2020. $5.3 billion of that came from issuing stock. It appears that around 500 million new shares were issued in 2020. That was a 50% increase – pretty high, but not as high as the revenue growth rate. As the chart below shows, there was a much bigger jump in the share count in 2018.

BYD financial statements

BYD

This dilution is one of the reasons I‘m still not totally sold on NIO. Yes, its growth is very strong and it is newly cash-flow positive. But dilution is very much still ongoing. For 2020, the dilution was well behind the growth in sales, but the truly enormous jump in the share count in 2018 gives pause. With cash flows now positive, NIO might not need to issue so many shares going forward. But for now, the dilution does temper my enthusiasm about the growth story somewhat.

Risks and Challenges

As I‘ve shown in this article, NIO is a cash flow positive EV company that is delivering much better results than many of its competitors. It is a key player in the fast-growing Chinese market, and is increasingly cash flow positive. These are all good things. However, I still can‘t rate the stock higher than a hold, because it does face many challenges. These include:

  • Competition. There is no shortage of EV companies in China. BYD (OTCPK:BYDDF) is growing deliveries even faster than NIO is, and U.S. EVs like Tesla are making gains in the country, too. As I explained in the detailed section on competition, the EV market is growing fast enough that a company like NIO can continue to grow without needing to take share from other players. As the market matures, though, the number of competitors may become a barrier to future growth, as it has been in the traditional automotive industry for some time.

  • Delisting concerns. NIO is a Chinese company, and some people think that Chinese stocks are at risk of being delisted from the New York Stock Exchange. The Chinese government has punished companies like DiDi (DIDI) for listing in New York, and the U.S. itself is questioning some of these listings due to auditing concerns. If NIO were delisted, current shareholders would still be able to hold Hong Kong shares. Additionally, the SEC‘s future delisting, if it did happen, wouldn‘t happen until 2024. Basically delisting is not a threat to anybody‘s actual share ownership in the near term, but the fear of it may trigger short term volatility.

  • Overall volatility. NIO is a risky stock going by volatility. It has a 2.42 5-year beta coefficient, which means that its swings are much more dramatic than those of the overall market. Many people dispute the claim that volatility is the same as risk. It‘s true that volatility is not the same thing as risk of long-term capital loss. However, it can be considered a risk metric when individual psychology is factored in. If someone is prone to panic selling, then that person may be more likely to sell a high-beta stock than a low-beta one on a drawdown. NIO stock is without a doubt ‘risky‘ to such a person.

The Bottom Line

The bottom line on NIO is this:

It is a very high growth EV stock with positive cash flows and a legitimate business model. That alone is enough to put it way ahead of the average EV company. If I were to invest in EVs, NIO would be near the top of my list. Nevertheless, I will pass. NIO as a company is quite good but the ongoing increase in the share count makes me less confident in the stock. For those who are “true believers” in the EV phenomenon, the risks may be worth it. For me, there‘s just a little too much uncertainty in the picture.

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