September is off to a rocky start. The Nasdaq is in official correction territory, and the other major indexes are flirting with it. It’s too early to say whether this is a garden variety correction in the course of a broader bull market or the start of something more severe. We may not know for another month. But let’s take a look to see how one of 2020’s great success stories is holding up: Chinese electric vehicle maker Nio Limited (NYSE:NIO) and shares Nio stock.
Electric vehicle stocks have been on fire all year, and Nio stock is no exception. Even after a modest pullback this month, the shares are up over 400% in 2020.
The shares have gotten a little choppy in recent weeks, due mostly to the announcement of a secondary stock offering that would potentially be dilutive to shareholders.
But Nio stock still remains within spitting distance of their all-time highs.
This is all the more interesting when you look at the performance of some of Nio’s peers.
Tesla’s (Nasdaq:TSLA) shares are down by about 16% (and were down a lot more than that just a few days ago. And Nikola Corporation (Nasdaq:NKLA), which has been accused of fraud by short seller Hindenburg Research, has seen its shares lose nearly 40% of their value since mid-August.
So, what’s so special about Nio stock? Why does it seem to be holding its own even while its EV peers have gotten slaughtered?
Nio Is No Johnny Come Lately
It helps that Nio is an established company – or at least as close to “established” as you can get in the world of electric vehicle startups. The company was founded in 2014 and went public in 2018. But unlike Nikola – which has yet to sell a vehicle – Nio stock is enjoying record sales. The company delivered 3,965 vehicles in August, a new monthly record and a 104.1% increase over August of last year.
And remember, there was no global pandemic and aftermath to deal with in 2019.
According to management, more growth is coming. In a Sept. 3 press release, William Bin Li – founder, chairman and CEO – commented, “As we continue to improve the production capacity for all NIO products, our monthly capacity will reach 5,000 units in September to support our future deliveries. With the closing of our recently announced [secondary stock] offering, we have further enhanced our balance sheet and optimized our capital structure to be better prepared for the acceleration of our core technology development, autonomous driving in particular, and the global market expansion in the future.”
It also helps that Nio’s primary market is China. Chinese President Xi Jinping recently announced that China would aim to have its carbon emissions peak by 2030 and that the country would be carbon neutral by 2060.
Now, I have my doubts as to whether those targets are achievable. But if China is going to have any hope at all of reaching them, a large percentage of its vehicle fleet will need to switch over to electric vehicles. Nio is obviously not the only player in this space, but a rising tide lifts all boats.
And the Valuation for Nio Stock?
Nio stock would seem expensive by most common value metrics. It has no earnings, so the price-earnings ratio is meaningless. But it trades at a price-sales ratio of 18, which is even more expensive than Tesla at current prices. And in looking at the stock valuation relative to the number of vehicles sold, you get figures that simply don’t make sense.
Annualizing August’s 3,965 unit sales would get us to 47,580 cars in a year.
At Nio’s current market cap of $23.6 billion, that works out to around $496,000 per car. To put that in perspective, Toyota trades for about $18,000 per car sold.
I can’t pay that. Psychologically, I just can’t pay that kind of growth premium. No matter how rosy the growth scenario in China looks, it’s hard to imagine the company growing into that kind of a valuation.
If you buy Nio stock, make sure you keep a trader’s mentality. So long as investors are bullish about China’s push into green tech, Nio stock could keep pushing higher. But this is a trade, not a stock to buy and hold for the long term.
Eventually, this tech bubble will burst, and you don’t want to be left holding the bag.
On the date of publication, Charles Sizemore did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Charles Sizemore is the principal of Sizemore Capital Management.