Would Peter Lynch Buy This Stock?

This stock market upheaval could affect your wealth for the next decade. Here’s what’s happening, and

what it could mean for your money.

Peter Lynch is widely regarded as one of the best money managers of this generation. He ran the Fidelity Magellan Fund for 13 years, averaging an annual return of 29%. 

Now, Peter had a number of rules he followed, which he believed gave him an edge. 

One of those rules was to look for stocks that were not heavily owned by financial institutions. His thesis was if a lot of institutions own the stock, then there is a good amount of research on it, and chances are it is fairly priced. 

Well, we recently came across that fits Lynch’s rule…

NIO Inc. makes some of the most luxurious EV cars in China. Its shares are trading more than 66% off its highs…and institutional ownership sits at around 36.8%

Compared to Tesla, this stock sees roughly a third of the total searches by financial pros looking for electric vehicle stocks. And that’s after volume popped due to earnings.

Generally speaking, most investors have passed up on Chinese companies.

Yet, the recent rebound in Hong Kong stocks made us take a second look at NIO.

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NIO’s Business

NIO is a lifestyle brand that products and services in the home, energy, tech, and auto space in China. NIO designs and develops, jointly manufactures, and sells premium smart cars, next-generation autonomous driving technology, electric powertrains, and batteries. 

What makes NIO so unique is that utilizes battery swapping technology for its cars. It offers fix, six, and seven-seater electric SUVs, and smart electric sedans. 

Its power solutions include Power Home, a home charging solution, Power Swap, its battery swapping service, and Power Charger, a fast-charging solution. Other services include Power Mobile, Power Map, and NIO House. 

In May of 2022, NIO delivered 7,024 vehicles. And have delivered 37,866 vehicles year-to-date. An increase of 11.86% year-over-year.  

Despite COVID being a concern in China, NIO has been able to increase its deliveries. 

In Q1 2022, The company delivered 25,768 cars vs. 20,060 (the same time last year). 

Financials

One thing that really stands out with NIO is the rapid progress the firm has made over the last few years. 

It has been able to 7x revenues in just four years. And it took its gross margin from -15.3% in 2019 to 18.9% in 2021. 

Its been able to grow its revenue (YoY) by 66.45%, which is significantly better than the sector median of 23.08%. Over the last 5-years, NIO has seen its revenues grow an average of 1,485%.

What’s even more impressive is the company’s operating cash flow growth (YoY) which stands at 0.79%, now compare to the sector median of -15.48%, you can see why it’s so outstanding. 

NIO has total debt of $3.48 billion. However, it is sitting on $7.79 billion in cash. Meanwhile, the company boasts a market cap north of $26.42 billion. 

NIO has a current ratio of 2.18x and a quick ratio of 2.0x. 

Both numbers are extremely healthy and indicate that NIO has no issues with handling short-term liabilities. 

Valuation

NIO operates at a net loss and therefore has no P/E ratio. The firm lost around $281.2 million in Q1 of 2022, representing an increase of 295% from the first quarter of 2021. 

Believe it or not, NIO has a better price-to-sales ratio at 4.24x than LI 5.26x, LCID 221.23x, RIVN 72.19x, and even TSLA, which is at 10.45x. 

NIO has a negative EBIT Margin, EBITDA Margin, Net Income Margin, and a negative Return on Equity. Clearly, it has a ways to go before it reaches profitability. 

However, it is a growth juggernaut. 

Revenue growth has increased 66.45% (YoY), which is something investors need to see if they are going to go for a company that isn’t profitable yet. 

In fact, its revenue 3-year growth (CAGR) is even better than TSLA, 79.49% vs. 40.15%

Our Opinion – 4/10

Shares of NIO are down nearly 50% YTD. But at a market cap north of $25 billion, one can argue that NIO is still expensive. 

There are just too many wildcards for us to like the stock here. 

China has struggled with lockdowns in 2022. And here in the U.S., Chinese ADRs have been under scrutiny, with threats of being delisted. 

Not to mention, the global economy is expected to slow down over the next year. And that’s why we can’t recommend this stock at these levels.