Goldman Sachs Called NIO Stock Overvalued. Are They Right?

Chinese premium electric vehicle maker NIO (NYSE:NIO) has taken off like a rocket ship in 2020, with NIO stock surging nearly 600% from a low of ~$2.40 in March, to a high of ~$16.40 in July.

Nio Stock May Actually Be Worth the Gamble This Time

Source: xiaorui /

In mid-July, Goldman Sachs said in a research note that the rally was overdone. The analyst team said that the NIO stock price reflected “over-optimism.”

In response to the bearish note, NIO stock has dropped. By about 25%. To levels around $12.40 today.

Time to buy the dip?

Not yet. Goldman Sachs is right. NIO stock price up above $15 did reflect far too much optimism with respect to the company’s realistic growth prospects. Down below $13, some of that optimism has been sapped out.

But not all of it.

By my numbers, NIO stock is in fairly valued to slightly overvalued territory here. No need to rush buy the dip in a stock that has only fallen back into fair value territory. Especially in a highly volatile name like NIO.

Chances are high that NIO stock eventually plummets back towards $10 in the foreseeable future. If it does, buy the dip. Until then, maintain equal-weight exposure.

Here’s a deeper look.

The NIO Stock Growth Narrative Is Promising

As I’ve said countless times before, NIO projects to be a leader in what will one day be a huge premium Chinese EV market.

The story is pretty simple.

China’s auto market is the largest in the world. The government is very committed to pushing adoption of zero-emission vehicles in that huge auto market in order to reduce the country’s carbon footprint and improve the air quality in many of the country’s large cities. As a part of this commitment, the government is targeting 25% sales penetration for zero-emission vehicles by 2025.

Concurrent to this robust government support for EV adoption, consumers globally are pivoting towards socially and environmentally positive products and services, which is creating a rising demand tide for EVs.

Broadly, then, thanks to robust government support and rising demand trends, China’s EV penetration rate projects to rise from a few percent today, to 25%+ over time. Because China’s auto market is the largest in the world, this significant ramp in China EV penetration implies that China’s EV market will one day be the largest EV market in the world, too.

In that huge EV market, the premium vertical will be large. That’s because Chinese consumers tend to have an affinity for luxury products. So, in China, those who can afford a premium EV, will likely buy a premium EV.

In that premium EV vertical, NIO projects as one of two sizable players, with the other being Tesla (NASDAQ:TSLA). That’s mostly due to NIO’s deep technology portfolio, impressive early traction in the market, strong brand equity and unique approach with battery-swapping which resonates with urban Chinese consumers.

Big picture: China’s premium EV markets projects to be huge, and NIO projects as one of the leaders in the market.

On that basis alone, NIO has huge long-term growth prospects.

But Valuation Matters

Although NIO’s long-term growth prospects are huge, valuation always matters, and the team at Goldman Sachs is right — the valuation on NIO stock price shot into over-optimistic territory.

Here’s the math.

China sells 20+ million passenger cars per year. That number will grow over the next decade to 26.5+ million with population growth and urbanization trends. Of that 26.5+ million, I think about 30% will be electric vehicles, about 8+ million EV deliveries in China in 2030.

The upper- and upper-middle-income bands in China account for about 10% of the total population. Realistically, then, China’s premium EV market will represent about 10% of the total EV market. That implies 800,000 premium EV annual deliveries by 2030.

I see Tesla and NIO as being the only two relevant players in that market and surmise that they will split the market. Assuming so, NIO could be looking at 400,000+ deliveries by 2030. On an average sales price of $40,000, that produces $16 billion in net auto revenue.

I think NIO can net Tesla-like auto gross margins of around 20% and an industry-average opex rate of ~10% by 2030. Assuming so, you’re talking about 10% operating margins on $16 billion in revenue, or $1.6 billion in operating profits.

Making some normal assumptions on financing costs, tax rate and share count, my modeling suggests that $1.50 in earnings per share is doable for NIO by 2030.

Based on a market-average 17-times forward earnings multiple and a recommended 8.5% discount rate, that implies a 2020 price target for NIO stock of about $12.25.

Thus, NIO stock today is fairly valued, and prices up above $15 aren’t fundamentally supported.

Be Ready to Buy the Dip

NIO stock is highly volatile.

Just look at what NIO stock price has done since the company has been public. It’s gone from $10, to $6, to $11, to $1, to $15, to $12. All in just two years.

Given this history of volatility — coupled with Covid-19 macroeconomic volatility as well as volatility inherent to China’s auto market — it is quite likely that this isn’t the last time NIO stock sells off in a big way.

To that end, my advice is simple: be ready to buy the dip… once the stock dips into undervalued territory.

I’m talking dips to the ~$10 range. If NIO stock drops back towards and perhaps even below that level, buy the dip. Until then, maintain equal-weight exposure, and trim exposure if the stock rallies back above $15.

Bottom Line on NIO Stock

The best of the 2020 rally in NIO stock has already happened.

That’s not to say this isn’t still a great long-term investment. It is. All growth investors should have some NIO in their portfolio.

But, it is to say that the stock — which was terribly undervalued coming into the year — is now fairly valued, so further near-term upside is limited by valuation friction.

Let the hype cool down. Let the stock bounce around. Buy the dip if shares drop back towards $10.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NIO.

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