The year just keeps on getting better and better for Nio (NYSE:NIO) stock. It posted record deliveries in September and continues to increase its revenues at a healthy pace in the third quarter.
Nio has a lot of momentum heading into the latter part of the year. As a result, Nio stock’s six-month return relative to the S&P 500 is a massive 1,048%. Though it’s currently overvalued, the poor possibilities of a pullback present a great opportunity for investors to expand their portfolios.
Electric vehicle players are riding high on the tailwinds from the U.S. election. President-Elect Joe Biden’s win offers greater hope for a sound partnership with China and renewable energy advancement. Nio stock and its competition rose sharply when Biden claimed victory. With a solid third quarter, I expect Nio stock to climb even higher because it’s best to invest in the stock at this time.
Earnings Preview
Nio will report its third-quarter results on Nov. 17. So far, the vibes are positive as the company hit a new sales record in the quarter. However, investors would be interested in knowing the outlook for the remainder of the year with the volatile business environment. All in all, though, it seems like another solid quarter for Nio.
Deliveries increased by roughly 154.3% compared to the same period last year. The company’s September deliveries were its highest for a month, with 4,708 deliveries. These deliveries represent a growth of over 133% year-over-year. Combines sales of the company’s ES6, ES8, and EC6 models were 26,375 for this year.
Nio continues to face competition from international and domestic competitors. Its local rival Li Auto also performed well in the third quarter, with 3,504 deliveries in September alone. This number represents a 31.3% growth sequentially. Tesla (NASDAQ:TSLA) is also facing the heat from China’s local competition, slashing prices for its Model 3 EVs.
Analysts estimate revenues to be $616.3 million for the third quarter, which is up 139.8% year-over-year. Additionally, its loss per share is expected to 17 cents, significantly better than the 35 cents loss per share year-over-year.
Puzzling Valuation
Nio stock’s current valuation has been a significant subject of debate in the EV industry. The chart above shows how the price-sales ratio for Nio is significantly higher than Tesla. Even though Nio is roughly one-eighth of Tesla’s market capitalization, it is trading over 28x forward sales. On the flip side, with a $394 billion valuation, Tesla is trading at roughly 22x forward sales.
Analysts are in two minds about the price targets for the stock. However, the vast majority of analysts believe that the stock is trading well over its mean target price. According to estimates, it is trading at twice its current price. The EV space is exceptionally competitive, and the company lacks profitability, which weakens its case. Additionally, Nio’s beta is at 2.6, which points to the riskiness of the investment.
On the flip side, some argue that Nio stock’s valuation is justified. It has been growing its deliveries by double digits for the past several quarters and has the support of the Chinese government in advancing its presence in the domestic market. Moreover, it continues to narrow down its losses with every passing quarter. With the rapid increase in deliveries each month, expect the company to turn a profit soon.
There are two ways of looking at things here. I feel as though both arguments have a lot of weight behind them, but the reality is that the stock is overvalued. However, it’s tough to say whether there would be a pullback anytime soon.
Final Word on Nio Stock
Nio is an exciting entry in the congested EV space. It continues to perform exceedingly well, posting healthy delivery numbers each quarter. It is priced significantly higher than its mean price targets, which limits its attractiveness to investors. Valuation metrics are on the higher side, going past industry stalwarts such as Tesla.
However, it’s tough to foresee a pullback at this time so it wouldn’t be a bad time to load up on the stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
