NIO (NYSE:NIO), a major Chinese EV player that continues to expand its geographical footprint, seems poised to add a substantial tech premium to its valuation. As per a Weibo post that cited internal sources, the company is apparently in the research stage of full-fledged smartphone business to complement its NIO Life brand. Should this development materialize, NIO would be following in the footsteps of the EV manufacturer Geely which is also looking to launch its own branded smartphones. Crucially, NIO refused to divulge any information regarding its smartphone plans when contacted, choosing to state only that further information would be communicated (presumably at a later date). Given the dearth of information around this initiative, it is hard to gauge the real-life impact of this move on NIO’s financials. Nonetheless, we can attempt a rudimentary analysis of the company’s smartphone moves in this post.
NIO’s (NYSE: NIO) EV Customers are Likely to Constitute Its Smartphone’s Primary Market
Credit Suisse expects NIO’s EV sales volume to hit 150,000 units in 2022. By the end of this year, NIO is expected to boast of a rich product portfolio, consisting of four electric SUVs – the ES8, ES6, EC6, and another unnamed SUV – along with the ET7 and the ET5 sedans. As far as the company’s production capacity is concerned, by the first half of 2022, NIO’s manufacturing plant in Heifei would double its capacity to 240,000 units per annum. Moreover, with extra production shifts, the plant would be able to manufacture 300,000 units per annum at full throttle. Additionally, the company’s NeoPark facility, which will have the capacity to produce another 300,000 units per annum, is also expected to come online in H2 2022. This means that by the end of this year, the EV manufacturer’s annual production capacity is expected to hit a whopping 600,000 units, as per a tabulation by Deutsche Bank. This brings us to the crux of the matter. NIO’s EV customers are likely to constitute the primary market for its smartphone business. Assuming that the company is able to fully utilize its EV production capacity and that 90 percent of these customers also choose to buy a NIO-branded smartphone, we are looking at an annual smartphone sales revenue of $378 million, based on 540,000 units sold per annum and an average retail price of $700. Add to this an assumed smartphone replacement cycle of 3 years, and we get additional revenue of $126 million (180,000 units replaced annually x $700 retail price) in a few years, equating to a total potential segmental revenue of $504 million. The assumed 90 percent translation of annual EV sales into smartphone sales is quite reasonable in our opinion as NIO’s customers are famous for their brand loyalty, as was in full display back in December 2021 when the company held the latest iteration of its NIO Day event. Coming back, NIO is expected to earn a revenue of $9.94 billion in FY 2022, constituting an increase of 76.24 percent relative to the $5.64 billion in revenue that the company is estimated to have earned in FY 2021. Based on an estimated sales volume of 150,000 units in FY 2022, NIO’s average revenue computes at $66,266 per unit. By applying linear interpolation, we can estimate the company’s revenue at full capacity. This comes out at $39.76 billion ($66,266 x 600,000 units). Of course, a potential maximum annual revenue of around half a billion dollars from smartphone sales is peanuts compared to NIO’s maximum EV sales potential of around $40 billion. However, this ignores the subscription revenues that NIO would be able to generate by offering software services on its smartphones. Finally, NIO currently has a Forward Price to Sales ratio of 3.7x for FY 2022, as per a tabulation by Finbox. By the 31st of December 2024, this ratio comes down to just 1.8x. Since discounting is a primary function of the market, we expect substantial valuation multiple expansion for NIO shares once the company’s smartphone-related plans are officially confirmed, even though the initiative is not likely to entail any significant revenues for the foreseeable future. This multiple expansion would be a direct function of an enhancement of the company’s tech credentials, paving the way for an upward ramp in NIO shares.
