Buying growth stocks when profits are just a rumor can feel like tempting fate. But some companies reward investors’ faith. And highflying stocks can grow into their eye-popping valuations, giving investors another chance to buy into the trend.
That looks to be the case with a trio of electric-vehicle makers: China’s
NIO (ticker: NIO),
XPeng (XPEV), and
Li Auto (LI).
Barron’s panned these three U.S.-listed Chinese EV start-ups in December 2020. We had fundamental reasons for that, including more EV competition and falling government subsidies. We even worried about a broader rotation out of growth stocks.
But the bear case boiled down to valuation. The Chinese EV players were trading, on average, at roughly 13 times estimated next year’s sales. That was a little higher than even
Tesla (TSLA) was trading for at the same time.
Claiming that growth stocks are expensive might not be bold, but it turned out to be a good call. NIO shares are down since the article appeared. XPeng stock is up about 15%. On average, they are up roughly 5%.
Ford Motor (F) and
General Motors (GM) are up 119% and 44%, respectively. Stock in EV leader Tesla has returned about 77%. The
is up 25% over the same span.
The automotive trade in 2021 wasn’t just in the Chinese EV players. That might change next year. After a year of sales growth and flat stock performance, the picture looks completely different.
The Chinese EV players will grow sales, on a combined basis, roughly 160% in 2021, leaving them trading at some 6.5 times next year’s estimated sales. Tesla stock is up 53% so far in 2021—adding to its epic 2020 run, when it gained 743%—leaving it trading at about 15 times estimated 2022 sales.
Now, the three Chinese EV makers are trading at a big discount to Tesla. Estimated sales growth for 2022 for the threesome clocks in at about 75%. Tesla should grow sales a still-impressive 40% to 50%.
Other stock catalysts are coming, too. Citigroup analyst Jeff Chung wrote this past week that NIO’s investor day, slated for mid-December, and coming pricing details for its new ET5 sedan, should help boost investor confidence. The ET5 will compete with EVs like the Tesla Model 3.
Monthly delivery results could boost all three stocks, too. XPeng reported better-than-expected earnings this past week, and management’s guidance for the fourth quarter implies that about 12,000 vehicles will be delivered in both November and December, breaking its monthly record.
Li Auto is due to report third-quarter numbers on Nov. 29. Investors should expect a sales beat. Both NIO and XPeng beat third-quarter sales estimates. For Li, Wall Street is looking for $1.13 billion in sales, up from about $370 million in 2020’s third quarter.
Analysts project the trio will become consistently profitable from 2022 to 2024, and there’s no need to rush back into stocks that aren’t producing profits. It’s hard to deny, however, that growth is significant and the outlook for EV sales looks better at the end of 2021 than it did last year.
EV penetration of new Chinese car sales hit roughly 20% in October. Penetration was about 6% for all of 2020.
That looks like growth to us.
Write to Al Root at [email protected]