Chip Shortage Won’t Chip Away at Market Gains

A recent piece highlighted why Nio (NIO) may be a better long-term growth play than Tesla (TSLA). Certainly, that sentiment appears to be holding true, at least since that article was published.

Since that May 26 piece, Nio’s stock price is up approximately 23% at the time of writing. However, investors in TSLA stock have seen an increase of only 2.9% over this time frame.

There are a number of reasons why this may be the case. It appears investors are starting to factor in Nio’s unique market position as a driving force behind higher projected global market share in the years to come. With Tesla being the go-to stock for so long, it appears NIO is rising as a primary option for investors looking for another option (or perhaps a better one).

Indeed, investors will want to constantly analyze the EV space from the lens of how the competitive landscape is shifting. Growth in the global EV market appears to be the primary focus of most long-term investors. In the case of Nio, there’s a lot to like in this regard. (See Nio stock chart on TipRanks)

Let’s dive into a couple of the key factors investors need to consider when choosing an EV play in today’s competitive environment.

Chinese Market Growth Key to Owning NIO Stock

The Chinese EV market is, by and large, the crown jewel of the EV sector globally.

Why?

Well, for starters, China’s EV market is absolutely massive. Currently, China’s EV market makes up approximately 44% of the global market share among electric vehicles. It’s a market that’s also expanding much more rapidly than most markets. It’s expected that China will see 51% EV growth this year alone, an absolutely speedy pace that is hard to ignore.

With Tesla still holding a market share lead in China, many Tesla investors may be quick to dismiss the idea that Nio could surpass the global leader in EV production in the near-term. However, the Chinese government has recently restricted ownership of Teslas in China. Moreover, many are speculating that the government will soon give priority treatment to its home-grown EV companies. That makes logical sense, given increasing U.S.-China tensions of late.

Accordingly, it’s increasingly becoming the view that Nio could take the market share lead in China, and sustain best-in-class growth rates in this space for a very, very long time.

Now, Nio has stated that the global chip shortage affecting this sector is likely to impact production numbers in the near-term. However, the expectation is that this shortage isn’t likely to be a long-term headwind. Additionally, this is a sector-wide problem, not specific to Nio. Accordingly, long-term investors looking for a winner in this sector appear to be ignoring this headwind as near-term noise.

What Analysts Are Saying About NIO Stock

According to TipRanks’ analyst rating consensus, NIO stock comes in as a Strong Buy. Out of 8 analyst ratings, there are 8 Buy recommendations.

As for price targets, the average analyst Nio price target is $61.91. Analyst price targets range from a low of $50.00 per share to a high of $81.00 per share.

Battery-as-a-Service Business Model Remains Attractive

Nio is unique among EV players in that the company’s business model is inherently different from that of rivals such as Tesla.

One of the key differentiating factors in this regard is Nio’s use of a “battery as a service” business model.

Essentially, NIO provides prospective car owners with a discount on the up-front purchasing costs of its vehicles. Prospective buyers can get a deduction of as much as RMB 70,000 (or roughly $11,000) off the sticker price of a vehicle. This up-front cost savings not only makes Nio’s offering more attractive to the Chinese middle class buyer the company is targeting, but also provides recurring revenue.

How?

Well, buyers of Nio vehicles sign up for battery pack subscriptions. What this means is that Nio owns the battery in the vehicle, and Nio car owners lease the battery back from Nio for a cost of approximately RMB 980 (or roughly $150) per month.

Batteries can be swapped out as necessary, which is a huge plus for EV drivers who see reduced performance with batteries over time. Additionally, owners of Nio vehicles receive battery performance assurances, something other car makers don’t provide. For Nio customers, upselling opportunities and flexible upgrade options, along with recurring revenue streams, make for a compelling opportunity.

These battery swap locations have continued to proliferate all over China. Additionally, Nio has moved forward with its plan to provide second-generation battery swap locations in partnership with Chinese company Sinopec.

Also, this past week, Nio announced its first second-generation highway service area battery swap location. For long-range drivers, and those bullish on Nio’s growing EV infrastructure across China, this is big news.

Indeed, Nio’s unique product offering and current market positioning are worthy of a second look by all EV investors and enthusiasts right now.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.

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