NIO Inc. (NIO) is a leading Chinese EV manufacturer. While the company is still in the early stages of its development cycle, NIO has enormous growth potential and will likely become one of the leading Chinese EV manufacturers in the future. China has a massive car market with a remarkably fast-growing EV segment, and NIO will probably enjoy a top position in this lucrative segment. NIO is growing sales aggressively, should become continuously more profitable with time, and the company's share price will likely continue to appreciate in future years.

NIO 18-month chart

Source: stockcharts.com

NIO had a remarkable run-up of over 2,000% in the second half of 2020. This massive surge occurred around the same time that Tesla and other EV-related stocks took off. This period was also around when I first got into this stock at roughly $8 a share. Since the substantial run-up, we've seen some volatility. However, the stock has mostly stayed in a consolidation pattern for nearly a year now. This phenomenon is quite constructive as NIO continues to ramp up production and increase sales. I suspect we can see more consolidation around here, but the stock should breakout and move substantially higher as NIO will likely continue to expand operations and grow sales considerably in future years.

Why The 2,000% Surge?

Some investors may be discouraged by a stock that had such a remarkable surge. Some market participants may even think NIO is a bubble, an extremely high valuation stock, just hype, overvalued, and so on. Before you make any decisions that may prevent you from making money in the future, please allow me to try to explain.

First, NIO is relatively new to the market, and the company only began officially making deliveries in late 2018. In addition, 2019 was a year of limited sales as the company had just started manufacturing, and then the coronavirus epidemic hit. During this time, few market participants had an appetite for a little-known EV start-up out of China.

However, as fear about the coronavirus began to die down, the EV market illustrated vital signs of recovery, and the EV wave lifted all tides, especially NIO's. The company's sales suffered greatly during the first half of 2020, and NIO was possibly even in danger of going out of business if sales continued to plummet. However, as the EV market stabilized and started to come out of its depressed state in mid-2020, NIO's sales began to surge, illustrating the company's remarkable growth and profitability potential.

Global monthly plug-in vehicle sales and YoY growth

Source: 

ev-volumes.com

We can see that EV sales began to slip in the first half of 2020 but began to recover by mid-year and continue to surge throughout 2021. Incidentally, NIO and other EV-related stocks started to recover and rise into H2 2020 just as sales began to improve and move notably higher.

Source: ev-volumes.com

Now, if we look at regions, we can see why NIO has such enormous growth potential ahead. Just look at the growth in its home market China. EV sales are exploding on the company's home turf. We see a threefold increase from around 387,000 vehicles in H1 2020 to approximately 1.15 million cars in H1 2021. This sales data illustrates incredible growth, and in China, NIO has the advantage of being at home.

NIO's Monthly Vehicle Sales

Source: carsalesbase.com

NIO started to ramp up sales into H2 2019, yet sales declined notably in early 2020, just as the initial wave of the coronavirus hit markets and impacted growth expectations. However, just as the global economy stabilized, NIO's sales improved in mid-2020, and the company's stellar growth came back in H2 2020, continuing into this year. Now NIO is up to around 10,000 vehicle sales per month, amongst the highest in pure 100% EV manufacturers in China.

In China, NIO primarily competes directly with Tesla (TSLA), XPeng (XPEV), and BYD (OTCPK: BYDDY). While Tesla is still the clear leader in this space (with over 50,000 vehicle sales last month), NIO is catching up, and NIO is the closest thing you will get to Tesla-like quality and performance, in my view.

NIO - A High-Quality True EV

NIO, like Tesla, is a 100% EV producer that offers several models. The company provides two ES series SUVs and an EC series crossover. Also, the company will offer a flagship ET7 sedan scheduled to hit the market early next year. The company also plans to release a smaller ET5 sedan, designed to compete with Tesla's Model 3 vehicle. Now, NIOs aren't cheap, as the ET7 starts at around $70,000, and its other models are also premium class vehicles. Moreover, the company provides stellar performance, as the ET7 has a remarkable 621-mile range, has 644 horsepower, and can hit 0-60 in under 4 seconds.

XPeng is also a 100% EV producer with bright prospects ahead. However, the company only offers two models, XPengs are cheaper than NIO's cars, and XPeng seems to provide less capability and luxury. BYD sells many different types of alternative energy vehicles, including passenger vehicles. However, BYD's cars are geared more towards China's budget-friendly segment. Thus, the company's cars are cheaper and offer less luxury and performance-wise.

Consequently, we have a picture emerging of the dominant EV players in China. Tesla remains at the top of the leaderboard as the company had a significant head start in the EV market. Tesla also has high-quality premium class models selling across various segments in China. However, with over 400 million drivers and remarkable EV growth, China's market should provide substantial growth opportunities for several major players. Amongst them, XPeng offers two attractive mid-level vehicles, BYD offers several lower-end models, while NIO brings authentic premium class EVs to the Chinese car market.

Therefore, NIO is well-positioned to increase revenues and earnings for many years into the future from here. Additionally, once the Chinese market gets penetrated, NIO can follow its rivals XPeng and BYD and start spreading its operations to Europe and other regions.

NIO - Extraordinary Growth Story

NIO is not selling 10,000 vehicles per month due to demand issues. Instead, the company is still dealing with supply constraints for now. This phenomenon is relatively standard, as we've seen cases with Tesla's early Model 3 ramp-up and other instances. Nevertheless, the company expects to reach 150,000 single unit shifts and 300,000 unit double shift capacity by year-end. NIO anticipates having another 300,000 annual unit capacity at its second plant, scheduled for completion in H2 2022. Therefore, we see around 600,000 production capacity by the end of 2022/early 2023. The company will likely produce four primary models by then, a full-size SUV (ES8), a crossover (EC6), a full-size sedan (ET7), and a mid-sized sedan (ET5). NIO's proposed lineup is essentially precisely the lineup that Tesla has now. Therefore, Tesla's closest and primary competitor could be NIO in future years.

Now, NIO only produced about $2.5 billion in revenues last year. However, this was the year NIO sold fewer than 40,000 vehicles. Given these sales dynamics, NIO had an average selling price ("ASP") of roughly $65,000 per vehicle. This year, the company is anticipated to bring in about $5.7 billion, and analysts expect NIO will deliver $9.5 billion in revenues in 2022. So, we're looking at about 128% in revenue growth YoY for 2021. This dynamic makes sense, as NIO should sell approximately 135% more vehicles this year.

However, next year's consensus figures point to revenue growth of only around 67%. This estimate seems light, as NIO should have production capacity for about 300,000 vehicles in 2022, yet most analysts predict revenues enough to cover just 150,000 cars. Also, in 2023, NIO could have a production capacity of 600,000 vehicles from its two factories. Nevertheless, consensus estimates are only $13.7 billion in 2023, implying an output of only about 210,000 cars.

These estimates seem highly conservative and likely lowball NIO's production capacity. Also, consensus estimates could be underestimating China's demand for high-quality premium EVs. I believe NIO can surpass consensus sales and revenues figures by quite a bit. In my view, NIO can probably achieve around 185,000 unit sales in 2022, which would put the company's revenues at about $12 billion next year (110% YoY gain). In 2023, NIO can probably achieve at least 300,000 in sales (as capacity could be near double by this time). For sales of 300,000 vehicles, we could see revenues of around $19.5 billion in 2023. NIO could get to about 450,000 car sales in 2024 and will likely hit its 600,000 unit target by 2025. Please keep in mind that my estimates are likely modest, as NIO could have the capacity to produce 600,000 vehicles in 2023.

In 2025, NIO could bring in close to $40 billion in revenues. After 2025, NIO could have a breakout revenue growth year. Other analysts expect this surge, so I am not alone here. If NIO continues to execute well I expect the stock can move up substantially in future years.

Here's what NIO's valuation could look like in future years:

Source: Author's material

Risks to NIO

Despite my bullish outlook, NIO is an elevated risk/high potential reward investment. Various factors could derail this stock from its sky-high trajectory. Increased competition, production delays, less than optimal execution, worse than anticipated demand, and a slew of other detrimental variables can damage the company's growth prospects and NIO's share price. Therefore, NIO should be approached with a healthy dose of skepticism and caution, in my view.