Back on June 8, I wrote that Nio (NYSE:NIO) stock may actually be worth a gamble for speculative investors willing to tolerate extreme risk. Since that story was published, NIO stock is up 110%.
I still believe Nio may have a bright future. But an already risky stock has become even riskier thanks to a bubble in electric vehicles stocks. At this point, I believe NIO stock traders should stay on the sidelines and wait for a better entry point.
The Good News For NIO Stock
The good news for NIO stock investors is that the company’s fundamental outlook has dramatically improved. Nio reported 3,740 vehicle deliveries in June, up 179% from a year ago and 8.8% from May.
Nio’s sales numbers bottomed in February, and its growth story is back in full effect. But most importantly, Nio finally appears to have its financial situation under control. The company raised $428 million in mid-June at just 6.9% dilution to shareholders.
Nio finished 2019 with a dangerously low $161.7 million. However, Nio had upped that level to $338.6 million by the end of March. The latest $428 million equity offering and a reported $1.42 billion deal with Hefei City have seemingly eliminated Nio’s cash problems until at least 2022, according to Bank of America analyst Ming Hsun Lee.
Looking ahead, Lee says the launch of the EC6 electric SUV in the third quarter and a 100kWh battery pack in the first quarter will be further catalysts for the company in the second half of 2020.
“We believe NIO’s fundamentals have bottomed out, demonstrated by improving volume sales and margin,” Lee says. “It is achieving faster than expected sales channel expansion and strengthening brand equity.”
The Problem For Nio Investors
The problem with Nio stock is its valuation, and it’s not alone. A bubble in EV stocks has pushed the valuations of stocks like Tesla (NASDAQ:TSLA), Nikola (NASDAQ:NKLA) and others to absurd levels. Nio is no exception.
One of the deceiving things about stock market bubbles is that they inflate the share prices of good companies right along with the bad companies. High-quality growth stocks like Microsoft (NASDAQ:MSFT) and Cisco Systems (NASDAQ:CSCO) were caught up in the dot-com bubble as much as Pets.com and GeoCities.
Goldman Sachs is projecting Nio’s revenue will grow 80%, 86% and 72% in 2020, 2021 and 2022, respectively. Analyst Fei Fang is also projecting 2030 earnings per share of around $2.50 for Nio. That profitability level is a far cry from the $1.44 net EPS loss the company has reported in the past four quarters.
However, despite those impressive growth estimates, Fang recently downgraded Nio stock from “hold” to “sell.”
“We believe the current share price reflects over-optimism given no substantial changes to volume/profit expectations,” Fang says.
Her $7 price target for Nio is based on those very same aggressive projections mentioned above.
“Our target P/E multiple of 7.7X is the average of the Chinese OEMs, large cap auto parts makers, and global luxury auto peers for 2020E,” Fang says.
How To Play NIO Stock
The same story is playing out over and over again with these EV stocks in 2020. Whether it be Tesla, Nikola, Nio or dozens more, analysts are all bullish on the EV growth outlook. But the absurd valuations have their hands tied.
Bank of America’s Lee, who has such bullish things to say about Nio in the comments above, has a “buy” rating for NIO stock. However, Lee also has just a $7.30 price target, about 44% below the current share price.
Personally, I would recommend long-term investors that are bullish on EVs and China and like the Nio story just be patient for now. NIO stock is already down more than 20% from its 2020 high. At some point in the next few quarters, I’m sure investors will get a change to buy the stock much closer to the $7 price targets the analysts have calculated.
It’s easy to get caught up in the excitement of a market bubble. It’s especially easy when you are bullish about a company’s long-term outlook, like I am with Nio. But whether it be Microsoft in 2000, bitcoin in 2017 or cannabis stocks in 2018, long-term investors are always rewarded for their patience when it comes to buying bubble stocks.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
