Nio (NYSE:NIO) shares have held up just fine amid a broad market sell-off in September. Nio’s share price is now up over 640% in the past six months. Even if you’re a long-term Nio bull, now is as good a time as any to start taking some money off the table.
Nio has always been a high-risk, high-reward stock. And there’s no question the risk associated with the stock is much lower than it was six months ago. But the stock’s near-term upside is likely also limited now that its market cap has skyrocketed from around $3 billion to $26 billion in a matter of months.
An electric vehicle market bubble has raised expectations for Nio into the stratosphere. With the stock trading at nearly $18, Nio may need several more years for its business to catch up to its valuation.
NIO Stock Headlines
There’s no question Nio’s growth metrics have been impressive. The company reported a 104.1% increase in vehicle deliveries in the month of August. But as always with Nio, it’s important to keep those numbers in perspective. That 104% growth still only represents a minuscule 3,965 vehicles. Even after a 33% decline due to the pandemic, Ford (NYSE:F) reported 433,869 deliveries in the second quarter. In other words, Nio delivered less than 1% the total number of cars Ford did. Yet Nio’s market cap is roughly in-line with Ford’s.
Bank of America analyst Ming Hsun Lee is a huge Nio bull. Lee has a “buy” rating and $23 price target for Nio.
“Unfettered access to low cost capital is one of the major edges for NIO; thus it has sufficient capital to invest in tailor-made autonomous driving solutions and charging related infrastructure,” Lee says.
Yet even Lee is forecasting just 101,000 vehicle deliveries for Nio in 2022. Two years from now, Nio will still be delivering less than 25% the number of vehicles in a year that Ford delivered in a single quarter. In the middle of a pandemic.
I understand the distinction between Nio and Ford, so Nio investors don’t have to send me angry emails. Nio is a growth stock. Not one of those curious growth companies like Tesla (NASDAQ:TSLA) that isn’t actually growing. Nio is a high-growth company in the largest emerging market economy in the world. I’m bullish on the company’s fundamental outlook. But as I wrote about Tesla recently, Nio investors’ biggest problem may not be that the stock sells off.
From 2000 to 2015, Microsoft (NASDAQ:MSFT) more than quadrupled its revenue. But because the dot com bubble had inflated Microsoft’s stock price so much in 2000, Microsoft shares actually dropped 20% over that 15-year period.
There’s a case to be made that Nio’s share price has gotten even more inflated than Tesla’s from the 2020 EV bubble. Tesla’s forward earnings multiple is a bloated 142, but at least it has one. Nio isn’t even close to profitable. Tesla’s price-to-sales ratio is an absurdly high 15.6. Nio’s is 17.6.
Even Lee is forecasting an earnings per share loss of $1.86 in 2022. Tesla is 17 years in and still not profitable without selling regulatory credits. Nio investors hoping the company is the next Tesla better hope it does a better job than Tesla in reaching profitability. If not, Nio may still be hemorrhaging cash by the time 2030 rolls around.
How to Play It
When stocks like Nio get caught in market bubbles, they trade a lot like penny stocks. Share price is no longer attached to the company’s business. It is attached to the story traders are obsessed with. At the moment, that story is that auto companies like Ford are dying dinosaurs and Nio is the future. I admit that is a great story. But the company itself is still on the first page of that story, while its valuation is already several chapters deep.
Any time a stock is up over 600% in six months, longs should at the very least be taking some profits. Nio is not profitable, it is years behind Tesla and it still needs to raise billions and billions of dollars to fund its growth. Meanwhile, competitors are expected to launch 20 new EV models by the end of 2021, according to Loup Ventures.
There’s nothing wrong with staying long Nio even after its big run. But investors need to understand the stock is still a high-risk speculative gamble. I think Nio has the best exposure to two long-term growth trends I love: China and electric vehicles. But the stock looked like a much better gamble at $3 than it does at $18.
On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
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.