NIO vs Workhorse: Which Stock is a Better Buy?

Alternative energy and electric vehicle (EV) stocks have been outperforming since the March lows.

Since the market bottomed in March, the KraneShares Electric Vehicles and Future Mobility Index (KARS) has a 104% gain, while the S&P 500 is up 59%. Two of the more impressive names within the EV sector are NIO (NIO) and Workhorse Group (WKHS).

From the March lows, NIO is up more than 1,000%.

(NIO is one of the stocks currently in the POWR Charts trading alert service based upon Christian Tharp’s 5 WINNING Stock Chart Patterns)

Over the same timeframe, WKHS is up more than 1,600%.

.

Despite the sector’s strong gains and concerns of overvaluation, the group continues to demonstrate relative strength.

This stock market has seen choppy price action this week, with most indices showing minor losses or gains. However, many EV stocks are breaking out to new highs.

Technicals

There are many similarities in the charts of both NIO and WKHS. Both experienced massive gains into July, then NIO and WKHS began consolidating these gains on low trading volume before stair-stepping higher. Typically in bull markets, sideways patterns lead to stocks moving higher.

Today, NIO’s consolidation from late-August, during which prices traded between $17 and $21, led to a 22% move higher on strong volume.

WKHS’ chart is similar to NIO, although the stock remains in its consolidation pattern. Given the overall bullish trend in the market and investors’ appetites for stocks in the sector, there’s a good chance that WKHS’ sideways pattern moves higher as well.

POWR Ratings

NIO is rated “Strong Buy” in our proprietary POWR Ratings system, while NKLA is rated a “Sell.”  In terms of individual components, NIO has an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. Out of the 115 stocks in the “China Stocks” group, NIO is ranked #3.

Catalysts

The recent catalyst for NIO’s big move was an upgrade from JPMorgan (JPM) to Overweight from Neutral. It also increased NIO’s price target from $14 to $40. Among the 15 analysts covering the stock, this is the highest price target, while the average price target is $21.72 according to TipRanks.

For WKHS, the looming catalyst is the USPS’s decision on an $8.1 billion contract for the production of 165,000 vehicles. WKHS looked poised to breakout higher last week, but the stock has declined as the decision was delayed by a few months. If WKHS wins the contract, it would likely cause share prices to rocket higher, as it would validate the companies’ technology and give it more resources to invest in growth.

Business Models

WKHS is working on producing electric delivery vehicles. It’s a massive market with major potential given the increasing number of deliveries due to growth in eCommerce. Further, electric delivery vehicles would be attractive to potential customers like USPS, such as FedEx (FDX), UPS (UPS), or Amazon (AMZN),  as they would save on costs and lower emissions.

Further, if the polls and predictions are correct, and Joe Biden wins the election, and the Democrats win control of the Senate, then it’s likely that the costs of these vehicles would go down due to subsidies and tax credits.

WKHS is still in its infancy, given that it’s only expected to produce about 300 vehicles this year. However, investors are tantalized by its potential, since it’s at the intersection of several bullish trends. WKHS’ long-term vision is to completely solve the “last-mile” problem. It wants to pair its self-driving trucks with drones that would be able to take packages from the delivery vehicle to a person’s doorstep, so the driver wouldn’t have to leave the car.

NIO is farther ahead than WKHS, in terms of executing its business plan. NIO’s latest quarterly report showed that it delivered 12,206 vehicles in Q3 which is a 154% increase from the previous year. The company is often referred to as the “Tesla (TSLA) of China” and does seem to be following the same trajectory.

It has focused its initial efforts on developing cars for the higher-end market. It’s also successfully cultivated a cult following like Tesla with the debut of its cars being highly anticipated and a waitlist quickly emerging. Like Tesla, it plans on producing cars at different price points in later years and plans to enter foreign markets in 2021.

Another similarity is that its major challenge is to scale production while maintaining quality. Tesla went through this process, and so far, they have been successful. But, they had to overcome some significant challenges, and at the time, there was considerable doubt that they would succeed.

Valuation

Both companies would be considered expensive by traditional valuation metrics. Neither is close to being profitable. But, companies choosing to reinvest revenue into their own business rather than maximize profits, are being rewarded by investors in this bull market.

Companies are being bought and sold based on metrics like revenue growth, total addressable market size, and gross margins. It makes sense when you consider that these metrics were the key to buying some of the best stock market winners of the past 10 years like Amazon (AMZN), Facebook (FB), and Apple (AAPL) while traditional valuation metrics might have kept you out.

Also for NIO and WKHS, the bull case is based on their promising technology, a strong position in a huge market, and the potential to disrupt traditional markets. Buying the stock is a bet on their management team executing their plans successfully.

As the bull market has shown, traditional valuation metrics don’t help determine where a stock is going, but they can help us understand the risk of the stock having a sharp decline if it fails to meet investors’ expectations for growth.

NIO has a price-to-sales ratio of 25, with an expected sales growth of 150%. More importantly, NIO has created cars that people want to buy, albeit on a small scale. But, there are already 2.5 million electric cars on the road in China.

Due to lower costs, better performance, and battery life, China is projected to have 70 million electric vehicles on the road by 2030. Therefore, if NIO can carve a piece of this market for itself, it would justify its $36 billion valuations.

WKHS is similar in that the potential for electric delivery vehicles is massive. WKHS also needs to begin and scale production at meaningful levels soon.

Currently, it has a $2.1 billion valuation, with just $200,000 in revenue. In many ways, WKHS is almost a binary play. It's either going to be worth much more if it can successfully produce its product at scale with high quality and win market share. Or, it will fail to do so, and its stock price would decline if it can’t show revenue growth.

Verdict

Though WKHS has more potential upside if it succeeds on their business plan, I believe NIO is the better, safer bet at this time. NIO is already delivering vehicles, which have been well-received by the public and the company should continue to grow at an impressive rate over the next decade.

Want More Great Investing Ideas?

2020 Stock Market Bubble Part 2?

7 Best ETFs for the NEXT Bull Market

5 WINNING Stocks Chart Patterns

NIO shares were trading at $28.46 per share on Thursday afternoon, up $1.96 (+7.40%). Year-to-date, NIO has gained 607.96%, versus a 8.96% rise in the benchmark S&P 500 index during the same period.

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles.

More...