There are 2 approaches we can use when it comes to analysis - top-down or bottom-up. A top-down approach is analysing the stock from the macro perspective - how the economy affects markets and ultimately share price. A bottom-up, on the other hand, focuses on analysing an individual stock, identify it's fair value and compare it with the market price. Today, most analysts use a hybrid approach of both to give a better grasp of the value of the stock.
I will be analysing the electric vehicle (EV) company "Nio Inc", ticker symbol NIO, from a hybrid approach. The reason I chose Nio is because Nio is expected to release its earnings estimate for full year (FY) 2020 and 4th Quarter 2020 (Q4) on 1st March, just a few days away. I currently hold Nio stocks, but I am bullish on it an am considering adding more to the portfolio, so why not analyse it anyway.
Background information on Nio:
The Tencent-backed company is an up-and-coming EV company today, just like BYD and Tesla. It manufactures autonomous driving EV that comes with advanced tech and even AI (Reuters). Besides EVs, it is also looking at providing "vehicle charging solutions" like its Power Charger and the batteries itself. It was founded in 2014, and went public in 2018. It offers several car models, all of which are Sport Utility Vehicles (SUVs). They have their own sports car, EP9, but only 16 of them were built, and 6 of those were sold to their own investors. More recently, Nio announced its new sedan, which is expected to be released in China early next year.
Top-down approach:
I start off with looking at the PESTEL effects on the economic environment - namely, political, economic, sociological, technological, environmental, legal. The global market size for EVs is expected to increase from US$115b to US$567.2b from 2019 to 2026, with a compound annual growth rate (CAGR) of 15.6% (Statista). According to Statista, EVs are now increasingly affordable and worth owning, such as due to the further range and lower cost. In China alone, there the number of EVs sold was expected to be 1.7m, which will rise to take over 25-50% of the passenger vehicle market within 4 years from now in the country.
Around the world, governments are subsiding both the supply and demand sides of the EV market. For example, with the EV subsidies in Germany, Renault Zoe has become free to consumers in July 2020, which raised demand. On the supply side, one example is how China's government issues a limited number of new license plates to regular vehicles each year, keeping the rest for EVs. Furthermore, according to Sustainalytics.com, as of end-2019, China has already built at least 500 thousand public charging outlets for EVs, and is riding an up-trend. Overall, the economy seems to be geared towards an EV-dominated market in the future.
Next, I look at the Porter's 5 Forces framework. The EV industry is still in the early stage, with an expected rapid growth over the next decade. This positive-sum competition increases industry profitability and reduces competition. Even with several competitors, it will be interesting to see how established incumbents like Nissan develop their own EV (Nissan Leaf) to compete with EV-focused firms like Nio.
So we now see that EVs taking over the vehicle industry is a "when, not if" situation, given the advanced tech developments, consumer demands and tastes, and governments' push. Furthermore, as investors, it seems that the EV industry is something worth investing in.
