Growth stocks can be an exciting area of the market with new technologies and emerging trends. But these stocks also tend to be more risky than value stocks. As a result, I only have a select few within my portfolio.
Chinese electric vehicle (EV) companies are among my top growth picks. And there are several reasons for this. There is clearly a trend towards electrification — especially in China where the state is looking to take pollution outside city boundaries. But Chinese EV firms, which have sizeable indigenous markets, also trade with valuations that are just a fraction of their US peers.
So let’s take a look at two Chinese growth stocks.
NIO
NIO (NYSE:NIO) shares are down 49% over the past 12 months, but have risen from lows around $13 in May. What’s behind the volatility? The shares plummeted along with other growth stocks towards the end of 2021, and the downward track was extended by Chinese lockdowns which hurt production.
But this volatility belies a considerable potential. NIO is among the most technologically advanced EV makers in the world, delivering class-topping range, innovative battery tech and plenty of gadgets. It also has a wide range of models on sales.
Despite the positives, NIO trades with a price-to-sales (P/S) ratio far below its US peers. The stock’s ratio is 5.2, versus Tesla‘s 12.5, Lucid‘s 131 and Rivian‘s 38.
NIO is yet to make a profit and is unlikely to do so until 2024, but it has been on a Tesla-esque growth curve. The Shanghai-based firm doubled revenue in each of the years between 2018 and 2021.
2022 might be different, given the impact of lockdowns, but growth will be enhanced by the opening of its second factory. I am aware that this year’s disruptions may push back profitability, but I’ll await updates on that.
I already own NIO shares, but would buy more after the recent dip. For me, this stock is dirt-cheap and there’s huge growth potential in the EV market — Tesla’s market-cap is currently 30 times higher than NIO.
Li Auto
Li Auto (NASDAQ:LI) hasn’t experienced quite the same volatility as NIO over the past year. It’s down 7% over the 12 months, and 16% over the past month. The stock really gained earlier in the summer after Li launched its L9 model — a six-seater, full-size flagship SUV — but has subsequently fallen.
There are several reasons for the recent dip (NIO experienced it too). These include concerns about Chinese and global economic growth, but also power outages. Li actually started delivering the L9 as the power crisis heated up.
But there are plenty of positives to look at with Li. Firstly, it’s cheap like NIO, with a P/S ratio of just five.
It’s L9 — which was long awaited — also looks set to really disrupt the EV market. The $70,000 SUV comes with two electric engines and one petrol, providing 1,100km of range. Equipped with sizeable infotainment displays, passengers can easily control displays via 3DToF hand/finger tracking cameras.
The growth curve is also impressive, with 140% year on year revenue growth registered in the last quarter. Li only has two models at the moment, and that could hold it back. But, in the long run, I’m bullish on Li. I don’t own this stock but would buy it today.
