Wait for Nio Stock to Drop Before Buying In

China’s electric vehicle manufacturer Nio (NASDAQ:NIO) is looking better and better with each passing day. Part of that has to do with the euphoria surrounding the EV sector and its most prominent player Tesla (NASDAQ:TSLA). But there are genuine concerns regarding overvaluation emerging as well. Nio stock is priced for perfection despite not having a ‘first-mover’ advantage and the lack of name recognition, especially in the U.S.

nio stock
Source: Carrie Fereday / Shutterstock.com

Don’t get me wrong. I find the company very interesting, and it’s finally moving the needle, with revenues and deliveries moving northwards. It also has the unique advantage of being headquartered in China, the world’s biggest EV market by a fair stretch. The company is currently one of the best bets to take away market share from bigger brands like Tesla, and it hasn’t even shipped a car to U.S. shores. Long story short, there are plenty of reasons to be bullish on Nio stock.

But with a market cap of $40.74 billion and 30.97 times enterprise value/sales, shares are trading too hot for my liking. I believe the markets already feel that they have another Tesla on their hands. And while there are some comparisons that you can make, Nio is not a like-for-like Chinese version of Tesla. That’s why I would wait for the stock to lose a bit more steam before buying in.

Government Backing Makes Nio Stock Unique

The company’s future success will have a lot to do with the kind of support it gets from the Chinese administration. If history is anything to go by, then you can expect the Xi Jinping administration to back Nio as the EV sector continues to grow by leaps and bounds in the largest country of the world.

This year, the company has secured a $1 billion loan from several state-owned companies in Hefei, the capital and largest city of Anhui Province. In exchange, Nio agreed to establish its company headquarters in the city. It will also give up a stake in one of its business units to the state entities. Meantime, state-owned automobile manufacturer JAC Motors is the company’s contract manufacturer.

That should give you some idea of how well-entrenched the partnership is between the Chinese state administration and the company. Couple this with Chinese preferences for local brands, and you can understand why investors value Nio stock so highly.

One final bit of information here is that the Chinese government wants to ensure NEVs represent one-fifth of new auto sales by 2025. As of 2019, electric vehicles accounted for almost 5% of the Chinese vehicle market. The pandemic has only exacerbated demand for electric vehicles, and I believe that Nio will ride this demand to the bank. In October, the company delivered 5,055 vehicles, representing 100.1% year-over-year growth. For the year, deliveries are now 31,430 vehicles in total, an uptick of 111.4% year-over-year.

Is a Tesla Comparison Justified?

Now let’s talk about the elephant in the room, valuation. The Chinese EV maker is trading at higher multiples than the industry leader. Momentum trading and high expectations are powering the stock to valuations that seem astronomical at this stage. The consensus 12-month-ahead target price for Nio stock stands at $138 per share, a 38.2% discount to the current share price.

Chart Shows the Growth Rates Between Nio Stock (NYSE:NIO) and Tesla (NASDAQ:TSLA) Stock
Source: Chart by Faizan Farooque

If we compare the company to Tesla, one has to appreciate how far the company has come in seven short years. Elon Musk’s brainchild produced just over 145,000 vehicles in the third quarter and delivered nearly 140,000 vehicles. And that doesn’t take into account the larger issue of Musk’s broad appeal and his brand equity in selling the issue, and how that helps sell Tesla cars. At this point, whether it’s his appearance on the Joe Rogan Experience or his colorful exchanges with journalists on an earnings call, Musk has perfected the image of the eccentric billionaire. Whether you like it or not, that provides publicity to Tesla.

That kind of notoriety doesn’t exist for Nio. Plus, Chinese companies don’t exactly have the best reputation in this country. You can blame that on the weak regulatory environment prevalent in China. But that is not down to the company, and you can’t really blame it on Nio. However, it’s not something that you can ignore, particularly if you were stung by Luckin Coffee (OTCMKTS:LKNCY) recently.

Let the Stock Cool Off

Nio has exciting growth metrics, and deliveries are growing at an excellent clip. If you are a long term investor in Nio stock, now is the time for your just rewards. But at current multiples, the stock is certainly overvalued. And it’s certainly not alone. Even Tesla, which is the clear industry leader, requires some essential bubble bursting. Valuing Nio almost identically to Tesla is unfair, considering that there is no comparison between the two companies in terms of deliveries, global sales, and net income.

That’s why I would wait for some correction before buying into this one.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience 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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/wait-for-nio-stock-to-drop-before-buying-in/.

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