I have always been extremely bullish on Nio. At this stage, my only concern is its valuation because the shares are trading at a trailing price-sales ratio of 24.
Another InvestorPlace columnist, Ian Cooper, wrote a fascinating piece on Nio stock recently. His logic is simple; whenever the stock falls, buy it. I believe that’s a sound strategy, since the stock’s overall trajectory is upward, with occasional small pullbacks. Cooper argues that “Before the company releases Dec. delivery numbers, you may want to take a position in the stock.”
This year, the EV maker has reported record deliveries almost every month. Whenever Nio announces its latest delivery numbers, its shares climb. Similarly, whenever the automaker unveils its earnings, the stock advances.
In the last three quarters, Nio has beaten analysts’ average estimates, leading to an immediate hike in the stock price and a gradual increase in the name over time. So all things considered, Nio stock is an excellent bet. But investors need to follow the news and focus closely on the firm after taking positions in the company.
Tesla’s Rival Emerges From Its Shadow
Competition in China is revving up for Tesla. Nio and Xpeng (NYSE:XPEV), two of the three Chinese new-energy-vehicle makers, are making serious inroads in the country.
China is the largest EV market globally, as 1.2 million EVs were sold there in 2019. Nio’s factory has stepped up its production by 50% and is on track to make 120,000 EVs per year.
In November, Nio reported record deliveries of 5,291 vehicles, up 109.3% from the same period a year earlier. Through the first 11 months of the year, its deliveries have jumped 111% YOY to 36,721 vehicles. Meanwhile, Tesla reported that the sales of its Model 3 vehicles in Chins had climbed about 78% YOY to 21,604
Tesla is now in a good position in the world’s largest country. But its market share is shrinking as the sales of start-ups Li Auto (NASDAQ:LI), WM Motors, Xpeng, and Nio climb. Tesla’s target of delivering 500,000 cars in China this year is now a pipe dream. That’s because, through October, the company had sold just 94,000 EVs in the country.
Nio’s Valuation Is Worrisome
Nio stock will climb above its current levels. Its sales growth shows that the company is growing rapidly. However, as is the case with many EV companies, concerns about its valuation are increasing.
Nio stock has pulled back nearly 30% from its 52-wk high in recent weeks, but the shares are still trading at a very elevated price-sales ratio. However, enthusiasm for the stock is warranted, and with the kind of sales growth it’s delivering, it will report positive earnings-per-share numbers sooner rather than later.
Plus, Nio’s valuation is actually lower than its two China-based EV peers whose shares are also traded in the U.S. Specifically, the trailing P/S ratios of XPeng and Li Auto are 59 times and 92 times, respectively.
Wait for the Right Moment
As other InvestorPlace columnists have said, Nio stock is an excellent investment. It’s executing well and handsomely rewarding long-term shareholders. At this point, it’s a given that for investors who want to play the EV space, Nio and Tesla remain the best options.
But the best price at which to buy the shares is still questionable. Based on the stock’s history, the optimal time to buy the name is just before the company reports its earnings or deliveries.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.