The electric vehicle market has become a battlefield lately, with companies coming in and out of favor almost overnight in the space. The success of the industry's value proposition was given a benchmark when Elon Musk brought Tesla (NASDAQ: TLSA) into the hands of retail and institutional investors who saw the stock price rise year after year, beating expectations and knocking down virtually all bears. 

The excitement and expectations that Tesla set for investors and entrepreneurs spread out across the United States, with names like Lucid Group (NASDAQ: LCID) and Rivian Automotive (NASDAQ: RIVN) promising relative competition for Tesla and delivering comparable - if not better - monster rallies in their respective stock prices. But, as many Reddit investors came to find out, this was not the case. After all, investing goes much deeper than just an investment thesis and a business plan (no matter how pretty slide shows are); it is about the economics of the business and its path to profitability.

Across the other side of the world, China has had its growth spur in the electric vehicle market, with some names attracting some of the most respected and reputable investors. For example, BYD (OTCMKTS: BYDDF) attracted Berkshire Hathaway, Warren Buffett, and Charlie Munger's giant holding company into the stock as recommended by Lu Li (one of the few lucky people in the world that Munger will listen to). There is a smaller, faster growing company that seems to be out of favor currently and which could actually pull off Tesla-like returns in the future. 

No Price Cuts at NIO, More Demand?

Tesla famously initiated a price war to speed up its sales and expand its market share. Soon after these developments, other electric vehicle firms followed suit, applying price cuts on their product lines. NIO (NYSE: NIO) is one of the few companies that knows how much its cars are worth. Despite running on lean gross margins since its inception to attract as much market share as possible, management knows that a price cut would effectively be taken as a negative for their targeted upper-middle-class audience in China who are looking for the status these vehicles can bring them in society. Knowing that the strategy of price cuts for the "common-folk" would not work for NIO vehicles, management has decided to reject the peer pressure and stand their ground.

NIO stock has been attracting institutional-level investments, and companies like Tencent (OTCMKTS: TCEHY) have invested up to 10% ownership in the car manufacturer. Other investors like Baillie Gifford have invested up to 7.8% in the company, with further investment in Tencent to amplify indirect exposure. 

Some bears thought that by rejecting the price-cut culture currently present in the EV market, NIO would see fewer deliveries and contracting revenues; this could not be further from the facts. In March of 2023, NIO delivered 10,378 vehicles, up to a quarterly total of 31,041 and a 20.5% increase in deliveries from the prior year.

This quarterly delivery figure came in line with management guidance during the closing of the fourth quarter in 2022; however, what seems most interesting is the possibility that NIO may beat estimates once again when 1Q'23 earnings are reported later this month.

Gearing up for an Earnings Surprise

Breaking down the deliveries for the three months making up the total first-quarter deliveries for NIO can give investors some insight into what earnings may bring for the stock price. For example, in January 2023, NIO delivered 8,506 vehicles, February reported 12,157 deliveries, and March came in slightly lower at 10,378. Many market participants see the quarter-on-quarter decrease as bearish, though the composition of these deliveries matters for the upcoming earnings figures.

Historically NIO sales have been distributed 50% and 50% roughly between their SUV product line and Sedan segment. As of the first quarter of 2023, delivery compositions tell a different story. Throughout the first three months of 2023, sales were roughly distributed as 70% for sedans and 30% for SUVs; this is crucial in determining the upcoming gross margins and ensuing figures for the company.

As of the 2022 annual report, NIO SUVs did not have autonomous driving capabilities; this feature was solely enjoyed by its sedan line. This feature effectively allows the company to charge a premium on negligible added costs to manufacturing, thus increasing the gross margin on these vehicles. 

Investors could then pinpoint the quarter's success, and a possible optimism rally in the stock price, to the successful expansion of the gross margin total along with a more straightforward path or announcement to nearing operational profitability by the company. 

Normalized Upside

The ongoing issue affecting EV stocks is their massively bullish and rich price-to-sales ratios. Where a typical car company may carry a ratio closer to 0.8x to 1.2x, companies like Tesla and Lucid carry ratios of 5.6x and 9.3x, respectively, thus placing an almost unachievable growth expectation on these revenue figures. 

This problem that American electric vehicle companies face is not present in China, as BYD carries a 1.0x ratio and NIO a 2.0x. While NIO's price-to-sales ratio still seems elevated, investors can project sales forward to the end of 2023, considering the steady year-on-year growth of revenues and deliveries in the 20-40% range.

Shall NIO achieve a 20% growth in revenue for the year, this ratio would effectively fall toward the more normalized range that car companies carry and still have the massive growth potential that these other traditional car manufacturers cannot offer due to their size and market composition.

Analysts see the stock almost doubling, which can make sense if investors apply a 3.0x price-to-sales multiple to 2023 expected sales. Even though this is a ratio on the richer side, the growth that NIO promises as potential can justify paying a bit of a premium for the company operating in the fastest-growing middle class in the world.