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Nio Stock Forecast And Valuation

Nio Stock Forecast And Valuation

Nio stock

First Published: 15 November, 2022
Last Updated: 23 November, 2022
Fact-checked by Adrian Müller

Table of Content

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Business Model of Nio

Nio is an automobile manufacturer of electric vehicles and recently posted a record number of deliveries in September to eke out a small gain, as Q3 deliveries topped 31,000 units. The overall performance for Q3 was surprisingly strong, with sequential YoY growth.

Although the final tally of 31,607 vehicles missed the midpoint of guidance (31,000 to 33,000), pushing to record levels while increasing production in Q4 (potentially up to 14,000 units/month for ~33% q/q growth) can see the year end with ~37% y/y growth hitting 128,000 units. Resumption of growth at this level should drive multiple expansions, potentially up to 4x EV/revenues (~60% upside to $20.8), considering these sequential growth rates were seen in late 2020 when multiples first began to expand as shares surged.

Nevertheless, there is still room for disappointment during Q4 earnings due to macro and supply chain issues still impacting the economy. Furthermore, Nio’s autonomous driving, which relies on Nvidia and Qualcomm’s chips, may be disrupted due to geopolitical tensions between the US and China.

Based on technical analysis, the stock has reached the ideal retracement after rallying 100% since the low. This is an excellent spot to enter a low-risk long, near support. Furthermore, fundamentals support Nio’s long-term growth story. Though the company could still see a couple of weak quarters, the stock may have already bottomed.

Nio’s Cost of equity

The capital asset pricing model (CAPM) can be used to compute the equity cost.

CAPM = risk free rate + (market risk premium x beta)

A risk-free rate is the rate of return that is the minimum rate of return that an investor expects for an investment that has no risk. Since every investment comes with a risk, the United States Government Bonds interest rates can be used as a reference. This is because the United States Government is unlikely to default on its payment obligation. The average yield for 10 years of government bonds at 3.95% will be used as the risk-free rate. While it is debatable that 20 years and 30 years of government bond yield could be used as a risk-free rate, it is unlikely to differ too much from a practical standpoint.

(Adapted from Trading Economics website)

According to Statista, the market risk premium for the United States equity market is 5.60%. Thus, the market risk premium to be used is 5.60%.

According to Yahoo Finance, the equity beta of Nio is 2.00.

(Adapted from Yahoo Finance)

CAPM = 3.95% + (5.60% x 2.00) = 15.15%

Nio’s Cost of debt

The cost of debt is the effective interest rate Nio will pay on its debt borrowings. Besides equity financing, which is the issuance of shares, debt financing is another way for the company to obtain external financing via bank loans. Given that Nio is an automobile company, they would have heavy capital expenditures to build the factories needed to produce vehicles.

Based on the 2021 annual report, the interest expense is $637,410, and the total debt borrowings are $14,969,176.

Cost of debt = Interest Expense / Total Debt = $637,410 / $14,969,176 = 4.26%

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Nio’s Weighted Average Cost of Capital

The weighted average cost of capital (WACC) is a company’s after-tax cost of capital from all of its external sources, whether through issuing common stock, preferred stock, bonds, and other types of debt like loans/bank borrowings. The WACC formula considers these and computes the average rate Nio will pay for this financing. The rate is used for the Nio stock forecast for 2026.

Based on the 2021 annual report, the total equity in millions is $34,785,557, while total assets are $82,883,601.

The equity financing ratio (E/V) = total equity / total assets = 34,785,557 / 82,883,601 = 0.42

The debt financing ratio (D/V) = 1 – 0.42 = 0.58

WACC = (E/V x Re) + (D/V x Rd x (1-T)

= (0.42 x 15.15%) + (0.42 x 4.26% x (1-25%)

= 7.71%

(Adapted from Nio 2021 Annual Report)

This means that for the Nio stock forecast, Nio has relied more on debt financing as their debt financing ratio is at 0.58 compared to their equity financing ratio, which is 0.42. In the current macroeconomic environment, being too heavily leveraged on debts would not be favorable for Nio as the United States feds have been hiking their interest rates continuously in an attempt to reduce inflation. The high-interest rates would lead to a higher interest expense for Nio, which would hurt their bottom-line earnings – potentially causing them to decide to reduce or completely cut dividends. Ultimately, the Nio stock forecast for 2026 would have a lower valuation in the future if their interest expense were to go up.

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Nio’s Terminal Multiple Assumption

The terminal multiple is another method of calculating the terminal value. This method assumes that the business enterprise value can be calculated at the end of the projected period using existing multiples on comparable companies.

How it drives the computation of the DCF is that at the end of the 2031 forecast, we multiply the EPS by the terminal multiple to determine the company’s terminal value. How it drives the computation of the DCF is that at the end of the 2031 forecast, we multiply the EPS by the terminal multiple to determine the company’s terminal value.

(Adapted from Yardeni, October 2022)

For this assumption, I used the forward PE of the automobile manufacturers sector, which is 24.2. As the current economic outlook is bearish, the forward PE for Nio stock forecast 2026 used is 20 to be conservative.

Nio’s Forecast and Revenue/Profit Expectations for Assumptions

There was a Covid-19 lockdown issued in China concerning their zero-covid policy, which has led to negative earnings in Q2. Hence, a more than 100% sell-off resulted in Nio stock valuation looking extremely cheap now. The Nio stock forecast 2026 will consist of 3 assumptions: normal-case, worst-case, and best-case.

For normal-case assumption, we will use the lower forecasted guidance of 50% revenue growth with a taper down over the years. This is a conservative approach since lower revenue growth is used compared to Nio’s historical revenue growth rate of 100%. Profitability is assumed to be in 2024, as inflation is still expected to affect 2023 due to the Feds aggressively hiking interest rates. A terminal multiple of 20 is used, which is also a conservative approach as the average forward P/E of the automobile manufacturer is 24.2.

For the best-case assumption, a 55% growth rate is used with a taper down over the years. Following by tapering down to 10% for the next 5 to 10 years. Profitability is also assumed for 2024 to be conservative. A terminal multiple of 25 is used, assuming the macroeconomic is favorable, and the forward P/E is more optimistic. This is also a conservative approach, as the average forward P/E of the automobile manufacturer is 24.2.

Lastly, on the worse-cast assumption, a 40% revenue growth rate is assumed with a taper down over the years. However, profitability is expected to be in 2025, with earnings missing profitability slightly in 2024. A terminal multiple of 15 is used and is also a conservative approach, as the average forward P/E of the automobile manufacturer is 24.2.

Nio’s Discounted Cash Flow

Nio Inc

Terminal Value

Growth rate

Scenario 1

Net Income

2022

2023

2024

2025

2026

2026

next 5 years

Normal Case

8,130,695.18

3,794,324.42

986,524.35

2,466,310.87

4,439,359.57

88,787,191.31

5 to 10 years

PV(7.72%)

61,216,513.88

7.72%

Discount rate

INTRINSIC VALUE

61,216,513.88

20.0

Terminal multiple

Nio Inc

Scenario 1

Normal Case

Net Income

PV(7.72%)

INTRINSIC VAlUE

2022

8,130,695.18

61,216,513.88

2023

3,794,324.42

2024

986,524.35

2025

2,466,310.87

2026

4,439,359.57

Terminal Value

2026

88,787,191.31

61,216,513.88

Growth Rate

7.72%

20.0

next 5 years

5 to 10 years

Discount rate

Terminal multiple

Terminal Value

Growth rate

Scenario 2

Net Income

2022

2023

2024

2025

2026

2026

next 5 years

Normal Case

7,001,431.96

4,060,830.53

1,644,636.37

3,563,378.79

6,235,912.89

155,897,822.24

5 to 10 years

PV(7.72%)

107,487,589.81

7.72%

Discount rate

Present value sum

107,487,589.81

25.0

Terminal multiple

Scenario 2

Best Case

Net Income

PV(7.72%)

Present value sum

2022

7,001,431.96

107,487,589.81

2023

4,060,830.53

2024

1,644,636.37

2025

3,563,378.79

2026

6,235,912.89

Terminal Value

2026

155,897,822.24

107,487,589.81

Growth Rate

7.72%

25.0

next 5 years

5 to 10 years

Discount rate

Terminal multiple

Terminal Value

Growth rate

Scenario 3

Net Income

2022

2023

2024

2025

2026

2026

next 5 years

Normal Case

8,853,423.64

4,603,780.29

822,103.62

1,726,417.61

2,836,257.50

42,543,862.50

5 to 10 years

PV(7.72%)

29,332,912.90

7.72%

Discount rate

Present value sum

29,332,912.90

15.0

Terminal multiple

Scenario 3

Worst Case

Net Income

PV(7.72%)

Present value sum

2022

8,853,423.64

29,332,912.90

2023

4,603,780.29

2024

822,103.62

2025

1,726,417.61

2026

2,836,257.50

Terminal Value

2026

29,332,912.90

61,216,513.88

Growth Rate

7.72%

15.0

next 5 years

5 to 10 years

Discount rate

Terminal multiple

Scenario

Probability

PV

Part

Scenario 1 (normal case)

0.6

61,216,513.88

36,729,908.33

Scenario 2 (best case)

0.1

107,487,589.81

10,748,758.98

Scenario 3 (worst case)

0.3

29,332,912.90

8,799,873.87

Sum

56,278,541.18

Translates to $56.279b market cap

Disclaimer: This is just for educational purposes and not for investing advice!

The discounted cash flow is a valuation method that calculates the estimated intrinsic value of a company using its expected cash flows for the next 5-10 years. It is one of the most commonly used valuation methods to determine if an investment is undervalued, reasonably priced, or overvalued at its current stock price. In this case, it is used for the Nio stock forecast.

For the Nio stock forecast 2026, the 5-year DCF is used. Based on the valuation, Nio is undervalued at the moment. As long as they can achieve profitability, the stock will be worth at least twice its current value. While Nio’s stock forecast is just an estimation of the valuation, it does show a glimpse of what Nio’s stock valuation is roughly worth. The stock has been devastated due to a poor economic outlook, which affects the period that Nio can achieve profitability.

Limitations of Discounted Cash Flow Method

The major limitation of the discounted cash flow method is that it involves the estimation of future cash flow and is not reliant on actual figures. There are lots of assumptions involved, and each assumption will lead to a different value as the analysis is sensitive to the variables that have been inputted. Some key assumption variables are the growth rate for the next 5-10 years, the discount rate used in the terminal value computation, the dividend payout ratio for each year (if any), and the terminal multiple.

This is one of the reasons it is safer to have 3 different scenarios in the discounted cash flow model: the normal-case, best-case scenario, and worst-case scenario. The average of the 3 scenarios will then be used to determine the company’s value. Furthermore, this can be adjusted by giving each scenario a higher or lower probability, depending on the macroeconomic environment. An example would be giving a higher probability to the worst-case scenario as high inflations worldwide and costs increase. This would slow down the economy, decreasing top-line revenue. Higher costs would lead to a lower bottom-line net income. Hence, the discounted cash flow must adjust for these special macroeconomic circumstances via downward adjustment.

The discounted cash flow method depends on how accurate the estimates are. Additionally, the value projection would be useless if there were too few uncertainties surrounding the company. Besides that, the weight averaged cost of capital (WACC) formula also involves estimation, which is a difficult number to arrive at. If the company has irregular historical cash flow, it can be challenging to forecast the cash flow for the next 5-10 years.

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References in this article

Average market risk premium in the United States from 2011 to 2021. Retrieved from
https://www.statista.com/statistics/664840/average-market-risk-premium-usa/#:~:text=The%20average%20market%20risk%20premium,and%205.7%20percent%20since%202011.

S&P 500 Sectors & Industries Forward P/Es (monthly, weekly since 1997). Retrieved from
https://www.yardeni.com/pub/mktbriefsppesecind.pdf

United States Government Bond 10Y. Retrieved from
https://tradingeconomics.com/united-states/government-bond-yield

Nio. Retrieved from
https://finance.yahoo.com/quote/NIO/

Annual Report 2018 – 2021. Retrieved from
https://ir.nio.com/financials/annual-reports

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About the author – D. Schmidt

I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.

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