Electric vehicle stocks have been one of the biggest investment themes of 2020. In a year where tech stocks in general have performed well, several electric vehicle stocks, such as Nio (NYSE:NIO) stock, have seen their shares run higher.
While Tesla (NASDAQ:TSLA) and its iconic CEO Elon Musk seem to capture most of the headlines, investors have plethora of elective vehicle makers to choose from these days, with Nio being one of more mature companies in the space.
Today, we’ll take a look at Nio to see if there’s still a little juice left in this electric carmaker.
What’s the Story with NIO Stock?
It might seem a little ambitious to call Nio a “mature company” given that it founded in 2014 and went public only two years ago. But this is also an industry in which electric truck maker Nikola (NASDAQ:NKLA) managed to secure a $14 billion valuation despite not having any revenues.
That’s not profits, by the way. Nikola has no revenues, as in it has yet to sell a single vehicle. Nikola, in contrast, runs a viable business and, like Tesla, has a lineup of models that customers are actually buying, including its ES6 and ES8 electric SUVs.
Like Tesla, Nio is also a leader in driverless car technology.
So, you can think of Nio stock as a relatively well-established player in a field dominated by startups.
The Bullish Case for Nio Revolves around China
China really took the lead in pushing for electric vehicle acceptance. Part of this is strategic, as China has to import most of its fossil fuels. China’s air quality is also notoriously bad, and the Chinese government sees electric vehicles as a potential solution for that problem.
Late last year, before the novel coronavirus outbreak wreaked havoc on the Chinese economy, the Chinese government was reportedly considering a requirement that 60% of all car sales in China be electric vehicles by 2035.
As a homegrown champion, Nio stock stands to benefit from that trend.
Nio is still very much a niche player, but it’s growing like a weed. The company delivered 3,533 vehicles in July, which was up 322% over the previous year. And year to date, the company had sold 17,702 vehicles through the end of July.
Now, again, that’s obviously small potatoes. In a typical month, General Motors (NYSE:GM) might sell half a million vehicles. But managing 322% growth during a pandemic is something to be proud of.
What About Valuation?
The future belongs to electric vehicles. It will take a while to get there, but the trend is in place and it’s backed by coordinated government action.
All of that’s great. But what about the price?
Nio has no earnings, so a traditional analysis of its price/earnings ratio is meaningless. NIO stock trades for 13x sales, making it even more expensive that Tesla at 11. But to put it in perspective, Toyota (NYSE:TM) – one of the world’s premier automakers – trades for 0.63x sales, and it’s a profitable company. Nio is 20x more expensive than Toyota.
If you really want to have fun, let’s look at price per car sold. Annualizing July’s 3,533 unit sales would get us to 42,396 cars in a year.
At Nio’s current market cap of $16 billion, that works out to around $380,000 per car. That seems cheap compared to Tesla, which trades at a valuation of around $838,000 per car sold. Toyota trades for about $18,000 per car sold.
It’s hard to justify Nio’s valuation by any traditional (or non-traditional) valuation. But this is also a market in which valuation is a nebulous concept. In a world of zero interest rates, pricing models don’t work particularly well.
Fundamentally, there is a lot of cash sloshing around after a relatively small number of exciting growth stocks. While it’s hard to make sense of Nio’s valuation, it’s not hard to imagine prices going a lot higher in the short term.
If you buy Nio stock, just make sure to keep your position size modest and be prepared to take profits (or cut losses) at any sign of market sentiment changing. Bubbles are a lot of fun as they inflate. They’re not so much fun when they burst.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser based in Dallas, Texas.