Nio Stock Is Pricey, But the Company’s Growth Outlook Is Enticing

There seems to be no stopping Nio (NYSE:NIO) stock at the moment. The shares of the electric-vehicle EV maker have increased 230% in 2020. Many are wondering if it can climb further, as  the shares trade at an expensive trailing price-sales ratio of 13.

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There is no doubt that the stock is an exciting growth play that should be included in every portfolio. Although Tesla (NASDAQ:TSLA) is the top electric-vehicle maker, its position in China is not ironclad. As history shows, the Chinese have a preference for local manufacturers. A strong nationalistic streak will help Nio as it looks to gain a more significant foothold in its country of origin.

Nio appears to be doing just that. The Chinese automobile manufacturer reported 3,533 vehicle deliveries in July, representing year-over-year growth of 322.1%. But there are other issues that the company has to deal with, such as its need for cash and its negative margins.

Overall, I would wait for a more attractive opportunity to invest in NIO stock. Although the EV maker’s long-term growth outlook remains intact, it’s trading at high multiples at the moment.

Nio Has an Advantage in China

It may come as a surprise to many, but Apple‘s (NASDAQ:AAPL) iPhone is not the top smartphone brand in the largest country in the word. Instead, local brands such as Huawei, Vivo, and Oppo dominate. That shows how much the Chinese value local brands.

China now accounts for roughly one-quarter of Tesla’s revenue. But its good times there may last for only so long, as Nio continues to make inroads in the Chinese market. If deliveries in 2020 are anything to go by, Nio is headed for a strong year, despite the novel coronavirus pandemic.

The Chinese government, the world’s largest importer of crude oil, also wants to focus on the environment and move to cleaner energy sources. China has already announced it will continue providing subsidies for new-energy vehicles, since it wants these automobiles to account for one-fifth of its auto sales by 2025. The extension of the subsidies is favorable for Nio.

The Risks Facing NIO Stock

Nio’s Chinese background may be a sticking point for some investors. The regulatory environment in the U.S. is far more robust than that of China. The recent fraud case involving Luckin Coffee (OTCMKTS:LKNCY) shows that lax regulations can cost investors severely.

Tesla, Nio’s main competition, also seems to have a better brand than Nio globally. That may be due to Elon Musk and his charismatic personality or it could be because Tesla generally has a better marketing strategy. But the bottom line is that Tesla has a more well-known brand than its competitors.

Over time, that could change. But in order to boost its brand image,  Nio will have to greatly increase its marketing budget at a time when the company’s capital expenditures are high.

The Valuation of NIO Stock

The big debate in the sector is whether to invest in TSLA stock or NIO stock. Both stocks seem expensive, but Tesla is on another level altogether. Valued at over $300 billion, the company’s market cap stands over and above the market caps of Toyota (NYSE:TM) and Honda (NYSE:HMC), which are among the biggest names in the automobile sector.

I believe TSLA stock is highly overvalued, while NIO stock has  a lot of optimism baked into it. Granted, much of that excitement makes sense, but it is still an expensive stock.

The Bottom Line

NIO stock is on a bull run, and it’s legitimate to question whether it can climb further. I believe Nio is a growth stock, and it has several favorable catalysts that will push the share price up further. Nio is a good long-term investment.

However, I think that it would be better to wait for a more attractive entry point before buying the shares.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.