Updated on May 12th, 2022 by Aristofanis Papadatos
NIO Limited (NIO), the Chinese manufacturer of electric vehicles, has become quite popular in the investing community in recent years. Despite the impact of the pandemic on the automotive industry, NIO stock rallied more than 1300% since the end of 2019, from $3.72 to an all-time high of $53 almost a year ago. The impressive rally resulted from the enthusiasm of investors about the growth potential of the company, which is in the very early stages of a multi-year growth trajectory.
Unfortunately, since it peaked last year, the stock of NIO has plunged 75% due to its sky-high peak valuation and the sell-off of the entire NASDAQ this year amid 40-year high inflation. Nevertheless, NIO is still nearly 4 times higher than it was at the end of 2019 while it has a market capitalization of $22 billion. It is thus a large-cap stock, many of which pay dividends to shareholders.
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Most income investors do not have NIO on their radar, as the company does not pay a dividend. The absence of a dividend is fairly common among growth stocks, particularly in the early phases of their growth.
Income investors who are attracted by the impressive return potential of NIO probably wonder whether the company will pay a dividend anytime soon. This article will examine NIO’s business model, growth prospects, and competitive advantages in an attempt to answer that question.
NIO manufactures and sells electric vehicles in China, Hong Kong, the U.S., the U.K., and Germany. It is also involved in energy and service packages, such as battery packs and components.
The cost of production of electric vehicles has significantly decreased in recent years. In addition, manufacturers have managed to greatly improve the autonomy of these vehicles thanks to technological improvements in batteries. As a result, the electric vehicle business has become a high-growth industry.
NIO benefits not only from the high growth rate of the electric vehicles, but also from the immense growth potential of the Chinese market. The Chinese economy has grown by more than 6% per year for more than a decade. In addition, it has recovered strongly from the pandemic thanks to its drastic measures which contained the pandemic much more efficiently than many other countries.
China is currently facing a surge in daily new infections and thus it has imposed lockdowns but this headwind is likely to prove immaterial from a long-term point of view. NIO is in the very early phases of the expansion of its business.
In the fourth quarter of 2021, NIO delivered 25,034 vehicles and thus grew the number of vehicles sold by 44% over the prior year’s quarter and by 2.4% over the previous quarter. In the full year, the company grew its vehicle deliveries by 109%, to 91,429.
Moreover, the ES8 model, which has a price above $60,000, has reached the number one position in the category of premium electric SUVs.
Despite the strong growth in its sales, NIO widened its adjusted net loss over the prior year’s quarter by 46%, to -$342 million. It thus remains far from becoming profitable. Notably NIO has incurred material losses in every single year since its IPO, in 2018.
NIO has provided positive guidance for the first quarter of 2022, expecting to deliver 25,000-26,000 vehicles in the quarter, for 25%-29% growth over last year’s quarter. Management also expects to grow revenues by 21%-25% over last year’s period. Overall, NIO seems to have ample room to keep growing its sales at a fast pace for years.
The production cost of electric vehicles has greatly decreased in recent years, thanks to the sustained decrease in the cost of batteries, which comprises approximately one-third of the total production cost.
In addition, the autonomy of these vehicles has remarkably improved in recent years.
Given also that consumers are attracted by the minimal operating cost of electric vehicles, with no need for gasoline or diesel, the electric vehicle industry has become a high-growth industry.
Source: Bloomberg New Energy Finance
As the above chart shows, the electric vehicle industry is only in the very early stages of its growth trajectory. It is likely to continue growing at a fast pace for decades and the sales of electric cars are likely to comprise 35% of all the new vehicles sales by 2040.
NIO is doing its best to enhance its production capacity in order to meet the growing demand for its vehicles. The company is building a new plant in Hefei, about 300 miles west of Shanghai, which is expected to begin production later this year. NIO expects this plant to produce approximately 240,000 vehicles per year.
NIO is expected to grow its revenue by 65% this year, from $5.7 billion in 2021 to $9.4 billion. Even better, the company has ample room to keep growing its revenue at a breathtaking pace for many more years. Analysts agree on this view, as they expect NIO to more than triple its revenue over the next three years, from $9.4 billion in 2022 to $29.8 billion in 2025.
NIO has a gross margin of 19%, which is much lower than the gross margin of the largest player in the industry, Tesla (TSLA), which has a gross margin of 27%. Tesla’s significantly higher margin can be attributed to the economies of scale that result from its much higher sales as well as regulatory credits. NIO does not seem to have a meaningful competitive advantage over Tesla.
Investors should keep in mind that the automotive industry is characterized by intense competition. Auto manufacturers have to spend hefty amounts on capital expenses year after year in order to come up with new models to remain relevant. Otherwise, they risk losing market share to competitors who launch new models.
Overall, the electric vehicle industry is much more appealing than the conventional auto industry thanks to its high growth. However, investors should remember that the auto industry, whether electric or conventional, is characterized by cut-throat competition, with narrow profit margins.
There is also one more caveat for NIO. The stock recently plunged due to a report that the stock may be delisted from NYSE, as it does not meet audit and report requirements. After the report, the company admitted the risk of being delisted and stated that it may implement a secondary stock offering in Hong Kong Stock Exchange. Domestic investors should be aware of this risk before investing in NIO.
Will NIO Ever Pay A Dividend?
In order to pay a dividend, companies need to generate positive free cash flows. In other words, their business should generate cash flows that exceed their capital expenses. Some popular stocks cannot pay dividends to their shareholders due to their negative free cash flows. For instance, Uber (UBER), Lyft (LYFT) and Nikola (NKLA) have not managed to generate positive free cash flows yet in order to pay dividends to shareholders.
NIO spends a significant portion of its revenues on R&D expenses in order to continuously improve the technology of its models and thus become more competitive compared to its peers. In the last 12 months, NIO has spent 13% of its revenue on R&D expenses.
NIO also spends a meaningful portion of its revenues on selling, general and administrative expenses. In the last 12 months, NIO has spent 19% of its revenue on these expenses. As a result, the company has not managed to make a profit yet while its free cash flows have remained negative every single year. It is thus evident that there are no funds available for the initiation of a dividend.
Analysts expect ΝΙΟ to switch from a loss per share of -$0.52 this year to a modest profit per share of $0.21 in 2024. However, investors should not expect a dividend from NIO even when it becomes profitable, at least as long as the company remains in high-growth mode. The company is growing its business at such a high rate that it makes much more sense to invest in the business instead of initiating a dividend.
As NIO has several years of double-digit revenue growth ahead, it is not likely to initiate a dividend anytime soon. Instead, its management is likely to remain focused on enhancing the capacity in order to meet the fast-rising demand for its vehicles.
In addition, as there is heating competition from the other auto manufacturers, NIO will continue reinvesting in its business in order to improve its vehicles and remain competitive. Therefore, its shareholders should not expect a dividend anytime soon.
High-growth companies do not offer a dividend for another reason as well. Their stocks usually enjoy such a rich valuation that a dividend is meaningless for the shareholders. To provide a perspective, NIO is currently trading at 59 times its expected earnings in 2024.
Therefore, even if the company distributes 50% of its future earnings in the form of dividends, it will offer just a 0.8% dividend yield. Such a yield will be negligible for its shareholders and as a result, there is little incentive for the company to spend half of its future earnings to initiate a dividend.
To sum it up, NIO is in the very early stages of its growth trajectory, with promising growth prospects ahead thanks to the impressive momentum in the sales of electric vehicles. As a result, the company will continue investing heavily in its business in order to expand its capacity, improve the technology in its vehicles, and remain as competitive as possible in its markets.
NIO is not likely to initiate a dividend for the next several years.
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