NIO IPO

I.

NIO is a Chinese EV startup, backed by Internet giants Tencent and Baidu. Like many transportation companies, they claim to be the “next Tesla”, offering similar performance and tech as Tesla but at roughly half the price. Their F-1—which is an S-1 for companies outside the US—was filed last month with the SEC and indicated they hoped to raise $1.8B, underwritten by the usual cast of top-quality underwriters. They came up a bit short on the first day of trading but recovered and exceeded the day following (today) when the market cap tickled $10B.

Incredibly, NIO was founded just 4 years ago and has grown to 4000 employees today. To IPO and acheive $10B in market cap in just 4 years is amazing. Financial types marvel at a unicorn ($1B valuation) being created in less than 2 years (see Groupon, Akamai). But NIO is even more rarefied and bordering on Netscape legend.

Their ES8 is a full-sized SUV with seating up to 7, offering about 300 miles per charge. Deliveries began in June of this year, 2018, and they have delivered roughly 1500 of these cars to date with plans to hit 10K total in 2018. The ES8 costs about $70K, but there’s an option to lease the battery, dropping the purchase price about $13,000 in return for $160/month lease option.

The ES6 is scheduled to begin deliveries in the first half of 2019.

NIO is also working on swapping and charging stations.

II.

NIO series A was in 2015 for about $350M. Series B was in 2016 for about $300M, Series C was in 2017 for about $650M, and series D was in 2017 for about $1.1B. Combined, they’ve raised about $2.4B, and as of the day following the IPO, they have a market cap that has approached nearly $10B. The IPO was accelerated, according to NIO CFO Louis Hsieh in the WSJ, because the money was needed and the public financing was “less dilutive” than private financing. A very bold move. And to do this on a US stock exchange for some reason seems even more impressive.

Of course, the hope here is that NIO might show the 10X pop that Tesla has shown over the last 5 years. But the Tesla run up was in anticipation of future sales bolstered by a steadily improving track record of meeting promises. The market has teased PS ratios with Tesla upwards of 15:1 in anticipation of future growth, but nominally these are around perhaps 3 or 5:1. Tesla today has a valuation of about $50B on $20B in sales. Round numbers. That’s a PS of about 2.5.

NIO’s targets for 2021 put them at 450K vehicles. And like Tesla, they plan on losing money every year as they barrel towards that figure. It took Tesla about 10 years to hit that volume, which they are just now achieving. And as the press has widely reported it is nearly killing the company and taking a heavy toll on everyone involved.

NIO is claiming they can ramp 3X faster than Tesla. If you in fact believe that, then 450K cars in 2021 at an ASP of $50K (assuming cheaper models are coming online), then that suggests around $23B in revenue, and with a PS of 4:1 (for such stellar execution) that would suggest a market cap of nearly $100B and a stock price of $100. And realistically, if they can achieve 450K cars in 2021, they will warrant a PS higher than 4 or 5 because the market in China is huge AND because they will have demonstrated a ramp that is unprecedented in human history. But remember, Faraday Future formed in 2014 and debuted their FF91 in 2017 and quickly grabbed more than 50,000 reservations. And then disappeared. This isn’t easy.

III.

In the end, there’s nothing magical about valuing electric car companies. They are car companies, subject to the same brutal market economics and paltry valuations that befall all car companies . There is a reason that Honda and GM get a PS ratio of 0.5: It’s because the business is brutal and low-margin with few barriers. Apple & Microsoft get PS ratios roughly 10X higher because those businesses are much higher margin and have a lot of barriers in place.

Long term, no car company can continue live in the same PS world as Apple and Microsoft. At least not for long. They will all eventually fall back down to the levels of GM and Honda: Fine companies that happen to exist in a brutal space where their valuation is primarily a measure of their ability to execute and control costs.

NIO’s valuation today—$10B—is very forward looking. That price assumes they will hit their 2019 targets. And if they do, the price will rise to anticipate 2020 targets. If they don’t, it will collapse to a price that is more aligned with their sales. If they only do 30K cars in 2019 with an ASP of $50K, then that puts them at $1.5B in sales and a valuation around $3B as the PS starts to treat them more like a car company with execution problems. That would put the share price at around $3/share.

The market for $50K cars in China is massive beyond words. This isn’t a question of demand. This is 100% a question of execution. The list of electric car companies that have promised to execute and failed is a mile long. The list of electric car companies that have executed is very, very short.

BP's Review of World Energy