97d4f548-35c8-4dd8-8b17-4a0d3a7564eb_Electric-Vehicles-Premium-Analysis.pdf
Electric Vehicles: Premium Analysis
Electric Vehicles
The electric vehicle trend seems bubble-like because of the valuations compared to traditional carmakers. However, these are growth companies where traditional carmakers are value stocks. Therefore, you'll need to decide if you see EVs as innovative tech that is pressing the envelope or if EVs should be valued like traditional automakers.
I had made a comment in my free newsletter about playing pickle awhile back with a trend. I was referencing Tesla, of course, where we have remained on the sidelines. Tech growth investors should figure out – do you plan to own Tesla or one of its competitors –or do you plan to not participate in the EV market? When there are significant gains in one company and this marks the start of a trend, then not making a decision is making a decision.
Moving forward, we will allocate a portion of our portfolio to "EVs" and this may include any of the companies listed below. This is a real trend that we want to participate in. David is leaning into Lucid Motors, and I am covering China's EV market.
Here is the summary of the analysis below:
• David is keen on Lucid Motors as a long-range EV that rivals Tesla founded by the former Chief
Engineer at Tesla. Although the initial price point is very high the company plans to release lower-priced models in the near future.
• I am interested in the lower price point that Xpeng offers and for its strategy to target the mid-tier and lower premium market. This makes sense to me in light of China's subsidies, especially since Tesla, Lucid, Nio, BMW, Mercedes – and now Apple will compete in the higher price range.
• Nio is appealing for its battery-as-a-service program and ability to compete with Tesla head-on in China as a domestic car company. Battery charging stations are a serious issue in China and Nio stands out for the battery swap described below.
• We also cover Li Auto, which is more family-oriented.
• Please also look for Knox’s coverage of Tesla from a technical analysis standpoint on the forum and any future webinars – especially as Tesla has added Bitcoin onto its balance sheet. We don't have much to add to this story fundamentally as the stock is well covered by other analysts but if Knox sees a breakout, then he may take it.
Part 1: Lucid Motors by David Marlin
Lucid is a disruptive, innovative company and we think there is more than enough hype and buying interest for this momentum to continue far longer than people expect. Knox is monitoring CCIV for an entry as the latest report shows that the merger with Lucid Motors is essentially done and will be formally announced as soon as this week.
A quick note on valuation …
Many investors will look at Lucid Motors, see they have $0 current revenue and dismiss the stock. It's important to know the market is always forward-looking. Money managers, analysts, and professional investors will typically look 1-2 years out when researching a company.
In the current market environment, they seem to be looking 3-5 years out in some cases. Why? The main reason is the Fed’s policy coupled with the low risk-free rate.
Professional money managers know the risk-free rate is the guaranteed return they can achieve by taking zero risk. When buying equities, investors are making a conscious decision that their returns will be worth the extra risk they are taking.
It’s important to note that the 10-yr rate has risen to 1.29% from 0.66% over the past few months putting some short-term pressure on the market. However, 1.29% is still a historically low rate and not yet a cause for concern for investors. If the 10-yr continues to rise, it will become a much bigger concern, but we are not at that point right now.
Lucid Motors Product Overview …
Somewhere over the last 10-15 years, the auto industry became the tech industry. It started with Tesla disrupting the traditional auto manufacturers by developing extensive proprietary technology for electric vehicles. The relentless rally in TSLA stock has sent every auto company in the world scrambling to produce EVs to capture the industry-wide shift. Even Apple has entered the arena with reports that they are actively working on car tech and plan to produce a vehicle in the next 3-6 years.
As in other subsectors within tech, we expect the company that produces the best and most advanced technology to capture the most market share. That is the case right now, as no company has been able to successfully challenge Tesla’s EV lead. The gap in innovation and technology could not be clearer as Tesla is essentially lapping its competition.
Enter Lucid Motors. Lucid’s CEO Peter Rawlinson said in an interview with CNBC last month that he was “disappointed the traditional auto industry hasn’t taken up the baton to compete with Tesla.” He went on to call the industry a “technology race”, which is exactly how we see it.
Lucid plans to deliver the Lucid Air, its first car, this spring from a new factory in Arizona. The first version of the Air — the Dream Edition — will go for $169,000 (see below for future pricing strategy).
CEO Peter Rawlinson was the former Chief Engineer of Tesla when the company first produced the landmark Model S. He told Forbes that in 2012, nobody believed him when he said the Tesla Model S would be lauded as the world’s best electric car. He said that he is receiving similar disbelief and hostility in response to claims that the Lucid Air will be a big breakthrough.
Even before they have delivered a single car, Lucid Motors is the only legitimate competitor to Tesla in the technology race. In his CNBC interview, Peter Rawlinson noted that the most important metric for measuring EVs is efficiency. The Lucid Air can achieve more than 4.6 miles per kWh versus the Tesla Model S record of 4 miles per kWh. Rawlinson has said that Lucid's efficiency is so much better than any other EV that the car uses 17% less energy to go a certain distance than their closest competitor.
The upcoming 2021 Lucid Air EV has a battery capacity of 113.0 kWh and a range as high as 517 miles. In comparison, Tesla’s 2021 Model S Plaid + announced a range as high as 520 miles, but the car will not be available until the end of 2021. The Lucid Air will also be the fastest charging battery-electric car in the world. The car can charge for 20 miles in one minute, or 300 miles in 20 minutes.
Below, we take a look at a more detailed comparison of the Lucid Air Dream Edition versus the Tesla Model S Plaid Plus:
As you can see, Lucid is a very real competitor to Tesla. We did not put a third automaker for comparison because there is not a third automaker that is even close technologically.
So, what about the valuation?
It is difficult to value Lucid right now because there is no revenue and have not delivered any vehicles. According to Forbes, Lucid could generate $900 million in 2021 revenue by making 6,000 Airs. Rawlinson told Forbes that volume could “top 25,000 units in 2022 as versions of Air priced at $77,000 arrive.”
We believe the best way to value Lucid is as a percentage of Tesla. Tesla has a current market cap of $755B, while CCIV’s implied market cap is around $70B. This would value Lucid at 10-11% of Tesla. Tesla should obviously be valued much higher than Lucid because they have proven the ability to scale, mass produce, and have built one of the best brands in the world. The question is, do those factors mean Tesla should be worth ~11x Lucid, a company that appears to be its equal in terms of technological development? We believe Lucid can be valued at 10-25% of Tesla for now, and potentially more in the future when they start successfully delivering vehicles.
In any event, Tesla may very well hit a $1T market cap at some point this year. At that point, Lucid should command a market cap north of $100B. I am expecting both companies to reach these milestones at some point this year.
The Future of the EV Industry
Elon Musk has said many times that his mission for Tesla is not to produce EVs for wealthy individuals, but to drive EV adoption globally and on a grand scale. Tesla has made great strides in making more affordable vehicles but still has a way to go.
Peter Rawlinson shares a similar mission for Lucid, as noted in Forbes: “He plans to use the Air’s 1,080-horsepower propulsion technology to “power cheaper electric vehicles [enabling Lucid to sell] hundreds of thousands of mid-
$40,000 electric cars and help big automakers sell $25,000 mass-market EVs” by 2026.”
Lucid is starting out as a premium, luxury EV that will appeal to wealthy individuals. However, the company plans to produce cheaper cars ultimately and use its technology to help other automakers produce EVs.
We believe the auto industry will consolidate over the next 5-10 years as companies with inferior technology are squeezed out of the market. Similar to the mobile phone industry where Blackberry, Nokia, and others could not keep up technologically, we will likely see a similar scenario play out in the EV market. It would not be surprising to see the global EV market dominated by a few companies that offer the best capabilities.
In the past, automakers like Mercedes and BMW would target a certain area of the market while Honda and Toyota would target another. With Tesla and Lucid planning to ultimately target the mass market, that will no longer be the case. Many legacy automakers targeting niche markets will likely fail because it will become abundantly clear which companies produce the best product. We would not expect consumers to pay a similar price to buy a mobile phone that has 50% the battery life that an iPhone has. The same will be true in the EV industry, as well.
Tesla has been called the Apple of the EV market as the innovative leader in the industry. In Lucid, Tesla has its first real challenger. We believe Lucid is positioned to be one of the few EV companies that dominate the industry along with Tesla. May the best technology win.
Part 2: Chinese EVs Continued by Beth Kindig
You can access our first blog post on Xpeng here.
Quick update on Xpeng:
Xpeng has dipped about 25% since we first covered the stock. We think now is a good time to expand on EVs and why we are bullish on this company.
As noted in the original Xpeng blog post, please keep in mind the company's lock-up expires on February 23rd with earnings out on March 8th. We’ve kept some dry powder for this position to allocate after the lock-up. We do expect volatility in this category as Tesla has proven is par for the course.
The company released January 2021 results with 6,015 vehicles delivered, a 470% increase year-over-year. The delivery consisted of 3,710 P7s and 2,305 G3s. This compares to 5,700 EVs in December and 8,500 vehicles sold in Q3.
At this rate, Xpeng will grow annual deliveries (and implied revenue) by 266% if you assume 6,000 deliveries a month for FY2021 at 72,000 vehicles compared to FY2020 at 27,050 vehicles. There will be new record months in 2021 and we believe the annual run rate of 72,000 vehicles is low. The estimated deliveries will put revenue at around $2.2 billion for Xpeng in 2021, which puts us at a 14.5 forward P/S. There will be times we see a 10 forward P/S or lower and a 20 forward P/S or higher in this category.
The goal here is for Xpeng to beat 6,000 deliveries a month because this will lead to revised estimates for 2021, which then leads to a higher stock price. That's the number we want to meet or exceed. I won't be too concerned if this isn't met every single month (i.e., we all saw the Tesla ups and downs tied to deliveries) but I also think Xpeng is more than capable of exceeding this number which is why we are invested.
The main catalyst that should help Xpeng meet these numbers is the lidar-equipped XPILOT sedan coming out in 2021. This will be the first electric vehicle equipped with lidar for autonomous driving and is based the Nvidia Xavier Drive system. Notably, Nvidia is releasing a more powerful drive system called Orin which is scheduled for production in 2022.
According to the deputy chief engineer of China Association of Automobile Manufacturers, China’s EV sales might reach 1.8 million units in 2021, up 40% from a year earlier due to economic growth, continuous stimulus policies, and sales promotions from manufacturers.
The company recently added assisted highway autonomous driving through the Xmart OS 2.5.0 on January 26th.
NIO:
The key driver for Nio is that China’s well-off and affluent population has exceeded 500 million.
NIO provided a delivery update on January 3rd with 17,353 vehicles delivered in Q4, representing an increase of 111% year-over-year and exceeded the quarterly guidance.
For FY2020, the company delivered 43,728 vehicles for an increase of 113% year-over-year. Cumulative delivered reached 75,641.
In the month of December, the company delivered 7,007 vehicles compared to the previous record in October of roughly 5,000 vehicles. The company continues to show strength in doubling its numbers.
In Q3 2020, NIO reported revenue growth of 146% year-over-year for $666 million. This represented quarterover-quarter growth of 22%. The company reported 13% gross margins compared to (12%) in the year-ago quarter. Vehicle margins also improved at 15% compared to (6.8%).
As with Tesla, the losses are the more concerning issue with electric vehicle manufacturers. Nio reported an adjusted net loss of $147 million which equates to an adjusted loss of ($0.12) EPS. The company had $3.3 billion in cash and $1.2 billion in debt as of September 30th. On January 19th, the company closed $1.5 billion in Convertible Senior Notes.
Battery Swaps and Battery-as-a-Service (BaaS)
NIO designs its cars around the battery pack with an interchangeable tray for 70-kWh and 100-kWh battery packs. The three models the company offers all use the same battery packs which helps facilitate battery swapping and battery leasing. Although a handful of attempts at battery swaps and battery leasing have failed, NIO is making this strategy work by offering free battery exchanges that are strategically located near their customers. The company is currently swapping over 4,000 batteries a day.
In August, NIO launched Battery-as-a-Service which provides car owners with the choice to either buy the battery or to lease the battery. Leasing the battery will cut down the price of the vehicle by 20% from around $52,000 USD to $42,000 USD. This means you can buy a luxury NIO for less than a BMW, Audi or Mercedes with the battery lease.
The monthly lease costs $140 per month for the 70-kWh battery pack. There is a flexible upgrade offering to the 100 kWh for a longer trip at $230 per month. Keep in mind, the fuel costs nothing so the lease is equal to the cost of gas.
In November, NIO launched the 100-kWh battery pack with 37% higher energy density than the 70-kWh battery. According to the press release, the 100-kWh battery can reach up to 615 kilometers compared to Tesla’s roughly 500 kilometers for its most expensive model.
NIO delivers a faster battery than a charging station. The strategy of battery swaps is popular in China where many residents live in apartment buildings.
As stated, various companies have attempted this before such as Renault. However, NIO connects all of the dots to offer a complete ecosystem supporting the battery swap and leasing programs. NIO also offers performance parity which means the customer does not need to worry about battery degradation as NIO guarantees the EV will perform years later as if its brand new.
NIO has formed a partnership with CATL to handle the battery business. CATL is the supplier that will repair and replace battery packs and also recycle cells. After the life of the battery has been used, they will be repurposed for bikes and scooters.
Valuation and Forward Guidance
The median analyst’s revenue estimate for 2020 is 63% year-over-year to $2.46 billion and for 2021 is 94% growth to $4.77 billion. The median EPS estimate for 2020 is ($0.58) and for 2021 is ($0.33).
Total revenue for Q4 is estimated between $921.8 million and $947.9 million for approximately 120% to 126% growth YoY and 38% to 42% QoQ.
On January 9th, NIO Day was held in Chengdu, China where the first sedan model ET7 was introduced with autonomous driving features and a larger 150 kWh battery pack for a range of 621 miles. Tesla’s Model S has a range of 402 miles and Lucid Motors has the longest range on the market of 517 miles. Nio’s ET7 will start at $69,000 with a 70kWh battery pack or $58,000 with battery-as-a-service (BaaS).
The ET7 is enabled by a sensor system called NIO Aquila and a super computing platform called NIO Adam. NIO Aquila has 33 sensing units and 11 high-res cameras and one long-range lidar laser. NIO Adam features four Nvidia's DRIVE Orin SoCs with over 1,000 TOPS of performance. Per this press release, Nvidia and NIO will work together on future fleets.
Nio has a high forward P/S of 17 although if the growth continues in the 100% range then there will be room in the valuation as the quarterly results come in. We fully expect to see EVs trade at a forward P/S of 10 at times and forward P/S of 20 at times although it’s becoming apparent the market is valuing EVs (and AVs) as tech companies with growth valuations.
EVs will be hard to time which is why we initiated in Xpeng and prefer to layer in. They are hard to time because the growth is phenomenal and the tailwinds are strong yet there is major volatility in this category. We think the information presented above justifies having exposure to this category and to continue layering in.
Analyst views
Nomura has a buy rating on Nio Limited. They like the company’s top-down launch of its EV pipeline – starting with luxury flagship model ES8, followed by more consumer-friendly models and variants.
As a first mover in BaaS, Nio "should benefit from the price advantage over other OEMs." The analyst believes that by "improving swapping time to only three minutes without human-labor, and with plans to add minihotspots (around the size of three parking spaces) covering most parts of the major cities in China, NIO hopes to redefine the whole user experience of owning an EV.”
Citi downgrades Nio to a neutral rating from Buy. It warns of potential competition for ET7 from Tesla Model S facelift. Citi turns cautious on its shipments forecast for Nio and now expects 2021 shipments of 82K vs. 92k prior and sees 2022 shipments of 144K vs. 162K prior.
Li Auto
Li Auto’s lockup expired January 26th.
Li Auto released its delivery update on January 1st with 6,126 Li Ones delivered in December 2020 for an increase of 530%, which is not very relevant given the first delivery started on December 4th of last year. However, the company did grow quarterly revenue by 67% quarter-over-quarter with 14,464 deliveries in Q4.
The first quarterly release as a new company was Q3 with total revenues of $369 million, up from 29% in Q2. Gross profit margins are better with Li Auto than peers Nio and Xpeng at 19.8% when compared to 13.3% in Q2 2020. Adjusted loss from operations was $6.6 million and adjusted net income of $2.4 million. The (thin) profit margin separates Li Auto from its EV peers.
The company has cash of $2.79 billion and debt of $380,000 as of September 30th.
Guidance for Q4 is between $457.8 million and $499.4 million representing an increase of 23.9% to 35.1% from Q3. The median analyst revenue estimate for 2020 is $1.41 billion to $2.94 billion for growth of 109% year-overyear. The median EPS estimate for 2020 is ($0.11) and for 2021 is $0.01.
Li Auto Key Differentiators
Li Auto announced the adoption of NVIDIA’s next generation autonomous smart driving chip Orin. According to the company, Li Auto will be the first OEM equipping its vehicles, the full-size extended smart SUV to be launched in 2022 with the powerful NVIDIA Orin SoC chip.
Li Auto is focused on SUVs priced between $20,000 USD and $70,000 USD.
One of the key differentiators for Li Auto is extended range EV technology (EREV) which allows drivers to charge the battery pack with electricity or gas. Battery EVs (BEV) are the more popular EV in China per Li Auto’s S1 filing with 81.3% of the sales volume in 2019 with Li Auto being the “first successfully commercialized EREV in China.”
In the S-1 Filing, Li Auto points out that Battery EVs face challenges, such as a lack of charging stations and limited residential parking spaces compounds this issue. The ratio of parking to car is 2 to 1 in first-tier cities with less than 25% of families in China having access to a suitable space for home charging compared to 70% in the United States. This causes Chinese EV customers to rely on public charging infrastructure with EV to public charging station ratio of 7.4 to 1.
Li Auto also highlights their early profitability as an advantage over its battery-powered competitors with bill of materials being 40% to 50% higher than ICE vehicles. the cost of lithium-ion batteries has decreased from $855 per kilowatt-hour in 2010 to $166 per kilowatt-hour in 2019 – yet the cost is only expected to decrease to $111 per kilowatt-hour in the next five years. The end result is that Li Auto can be more competitive on pricing compared to EVs while also more profitable. Li Auto also benefits from the 10% extra vehicle purchase tax on ICEs in China.
Li Auto provides this plot graph showing its range and cost is competitive in the SUV segment. Nio also looking good here with Xpeng not pictured.
In my opinion, one drawback is the lack of a sedan. Xpeng is an attractive stock for the P7 (and the growth that followed this release) and Nio for its upcoming sedan. Li Auto makes a case that China is relaxing the one-child rule yet having two children does not necessarily require a SUV. Despite relaxing this rule, the number of births in 2018 was at its lowest rate since 1961.
The sales numbers for sedans illustrated by Xpeng don’t agree with the statistics that the SUV segment is expected to become the largest segment by 2020 as measured by sales volume with a penetration rate at 45.4% now and growing to 49.2% by 2024.
ByteDance has invested $30 million in a Series C round.