Back in September 2019, Nio (NYSE:NIO) stock was trading at around $1.65 per share. On that day, I wrote a story in which I said Nio was a “lottery ticket with a decent chance of paying off.” I called it a “speculatory bet with tremendous upside if it gets its act together.”
Nearly a year and a half later, the stock is up 3,550% to around $57. To all of the NIO stock buyers back in 2019 that had the guts to buy that lottery ticket, congratulations. You hit the jackpot. But buying Nio or holding the stock without at least taking profits at this point would be like winning the Powerball lottery and using your hundreds of millions of dollars to buy more tickets.
NIO stock has gotten caught in an electric vehicle stock bubble. It no longer appears to be at risk of going to $0. But it will take at least a decade before Nio will be able to justify its current market cap.
NIO Stock Numbers
The good news for NIO stock investors is that the company is no longer on the brink of insolvency. After raising capital several times in 2020, Nio closed a $1.5 billion convertible bond offering in January. Nio has always been a risk-reward calculation for investors. The major risk was access to funding. It’s clear at this point that investors are willing and able to back the company’s growth investments.
The flip side of that calculation, the reward part, was always Nio’s mind-boggling growth. The company is certainly firing on all cylinders on the growth front these days. This week, Nio reported 7,225 January vehicle sales, beating its previous monthly record of 7,007 vehicles in December. The January delivery number also represented 352.1% year-over-year growth.
Of course, the biggest red flag for investors considering NIO stock at $58 is valuation. Without question, 352% growth is the major leagues of growth stocks. But Nio now trades at 47.4 times sales. Legacy auto makers Ford (NYSE:F) and General Motors (NYSE:GM) trade at under 0.7 times sales. High-growth tech stocks Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) trade at 4.8 and 9.6 times sales, respectively.
On the earnings front, there’s not much to say. Nio is still hemorrhaging cash. The company reported a $1.19 billion net loss in the third quarter, a slight improvement over the $1.21 billion net loss it reported in the second quarter. Nio is nowhere near profitable.
Bank of America analyst Ming Hsun Lee is projecting the Nio stock losses will narrow from $3.45 per share in 2020 to just 60 cents per share in 2022. But another way to look at it is that Nio will not reach profitability until at least 2023.
Nevertheless, Lee is bullish on the stock.
Lee says sales volume growth, margin expansion, autonomous vehicle, powertrain and technology, and new model launches will continue to drive long-term upside for NIO stock.
“We have a positive view on NIO considering its long-term share gain potential in the premium EV market and improving profitability with rising scale,” Lee says.
Bank of America has a “buy” rating and $70 price target for NIO stock.
I Want to Like Nio
Here’s the part where I say I really want to like NIO stock. I really do. Electric vehicles are a huge long-term growth opportunity. I love China as the world’s largest emerging market economy. I believe Nio has a great position in a massive Chinese EV market. But these EV stocks have gotten their share prices pumped up so high that it’s virtually impossible to justify buying them at this point. U.S. EV leader Tesla (NASDAQ:TSLA), for example, is currently valued roughly the same as the entire existing global auto market. Yet Tesla has about 0.5% global market share.
I believe the best-case scenario for a lot of these high-flying EV stocks at this point is that they drift mostly sideways for the next decade. At its current valuation, NIO stock is already pricing in a decade or more of best-case scenarios. If today’s best-case scenario happens, NIO will still be worth what it’s priced at now in 2030.
How to Play It
To justify significant upside between now and then, Nio will have to exceed today’s best-case scenario. Whatever the bulls are hoping will happen, Nio will have to do more.
If you are all-in on NIO stock for the long term, I understand. As I said back in 2019, Nio’s business has such an incredible long-term growth opportunity ahead. But with the stock up 3,550% in less than a year and a half, do yourself a favor. You won the lottery. At least cash in a big chunk of your winnings rather than just holding and buying more lottery tickets.
On the date of publication, Wayne Duggan held a long position in GM.
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. He 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.