In this article, I have evaluated China-based NIO Inc. (NIO) and Rolls-Royce Holdings plc (RYCEY) to determine the leading auto stock for 2024. After thoroughly evaluating these stocks, I think that RYCEY might be a superior choice for the reasons discussed in this article.
Rapid population growth, urbanization, infrastructure development, and industrial expansion are expected to drive commercial vehicle sales growth. Also, the escalating demand for high-end passenger vehicles is also likely to enhance the performance of the market. The global automotive market is projected to grow at a CAGR of 6.9% until 2030.
Moreover, November marks the third consecutive month that new-vehicle transaction prices were lower year-over-year, a unique milestone for the industry. In November, U.S. new vehicle sales reached 1,242,376 units, increasing 8.8% year-over-year, propelled by rising demand for electric vehicles (EVs) and the nation’s economic recovery.
Moreover, RYCEY is a clear winner in terms of price performance, as NIO has declined 19% over the past three months as compared to RYCEY’s 34.9% gain. Also, NIO declined 28% over the past year compared to RYCEY’s 260.2% gain.
Here are the reasons why I think RYCEY might perform better in the near term:
Recent Developments
On December 18, 2023, NIO announced that it had entered into a share subscription agreement with CYVN Holdings L.L.C (“CYVN Holdings”), through its affiliate CYVN Investments RSC Ltd (the “Investor” or “CYVN”), an investment vehicle based in Abu Dhabi, pursuant to which CYVN will invest an aggregate of $2.20 billion in cash to subscribe for 294,000,000 newly issued Class A ordinary shares of the Company at a per share purchase price of $7.50 (the “December Investment Transaction”).
Conversely, on December 15, RYCEY announced Turkish Airlines would order 100 Trent XWB-84 engines and 40 Rolls-Royce Trent XWB-97 engines. This would make Turkish Airlines the world’s largest operator of Trent XWB engines.
Recent Financial Results
In the third quarter that ended September 30, 2023, NIO’s total revenues came in at to RMB19.07 billion ($2.68 billion) while its adjusted loss from operations increased 20.3% year-over-year to RMB4.84 billion ($679.93 million). In addition, its adjusted net loss attributable to ordinary shareholders of NIO grew 27.4% year-over-year to RMB3.95 billion ($554.90 million).
On the contrary, during the half year that ended June 30, 2023, RYCEY’s revenue increased 14.3% year-over-year to £7.52 billion ($8.19 billion). Its profit for the period came in at £1.22 billion ($1.33 billion), compared to a loss of £1.56 billion ($1.70 billion) in the previous-year. Also, loss per ordinary share attributable to ordinary shareholders came in at £14.70p, compared to negative £19.29p in the previous-year.
Past And Expected Financial Performance
Over the past three years, NIO’s revenue grew at a CAGR of 63.6%. Analysts expect NIO’s revenue to grow by 9% this year but decline marginally in the fourth quarter ending December 2023. Its EPS is expected to be negative $1.66 this year, negative $0.38 in the current quarter ending December 2023 and negative $0.36 in the next quarter ending March 2024.
Conversely, RYCEY’s revenue has increased at a CAGR of 2.4% over the past three years. Its revenue is expected to increase 21.7% this year. Its EPS is expected to be $0.11 this year.
Valuation
NIO’s forward P/S multiple of 1.92 is higher than RYCEY’s 1.67. Additionally, NIO’s forward EV/Sales multiple of 1.88 is higher than RYCEY’s 1.87.
Thus, RYCEY is more affordable.
Profitability
NIO's trailing-12-month gross profit margin of 4.47% is lower than RYCEY’s 21.71%. In addition, NIO’s trailing-12-month EBITDA margin of negative 34.83% is lower than RYCEY’s 11.09%.
Thus, RYCEY is more profitable.
POWR Ratings
NIO has an overall rating of F, which equates to a Strong Sell in our proprietary POWR Ratings system. Conversely, RYCEY has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. NIO has an F grade for Stability which is justified by its 24-month beta of 1.42. On the other hand, RYCEY has a B grade for Stability, which is in sync with its 24-month beta of 0.94.
Moreover, NIO has a D in Sentiment in sync with its unfavorable analyst estimates. In contrast, RYCEY has a B grade for Sentiment consistent with favorable analyst estimates.
Among the 51 stocks in the Auto & Vehicle Manufacturers industry, NIO is ranked #44, while RYCEY is ranked #10.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Quality. Get all NIO ratings here. Click here to view RYCEY ratings.
The Winner
Demand for automobiles has remained solid through 2023 as pent-up demand, and a tight labor market pushed sales volumes notably above last year's supply-constrained levels. Industry players such as NIO and RYCEY are well-positioned to benefit from these industry tailwinds.
However, NIO's poor profitability, elevated valuation and high beta value makes its competitor RYCEY the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Auto & Vehicle Manufacturers industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
RYCEY shares were trading at $3.76 per share on Tuesday afternoon, up $0.05 (+1.35%). Year-to-date, RYCEY has gained 251.40%, versus a 25.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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