Known in many circles as the “Tesla (NASDAQ:TSLA) of China,” Nio (NASDAQ:NIO) is actually in a similar situation as Tesla at this point. Both companies have huge valuations and could potentially justify their nosebleed levels, but may have difficulty doing so. With a trailing price-to-sales ratio of 32, NIO stock has a meaningfully higher valuation than Tesla, which now carries a trailing P/S ratio of 28.7.
![A Nio (NIO) sign outside of the company's facilities in Shanghai, China.](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
Somewhat ironically, given the Shanghai car maker’s nickname, Tesla’s apparent slowdown in China and Europe has improved the outlook significantly. Nonetheless, Nio’s shares could be headed for further losses in the medium term, as the euphoria over electric vehicles appears to have cooled.
NIO Stock Has Meaningful Positive Catalysts
Tesla’s market share appears to be slipping in both China and Europe, giving Nio, along with several other automakers, the opportunity to hike their sales in those markets at the expense of Elon Musk’s company.
Tesla’s share of the battery-electric vehicle market in China dropped to 14.5% in the first 11 months of last year, meaningfully down from its 21% share for the first half of the year. Apparently a vehicle called the Hongguang E50 Mini , manufactured by General Motors’ (NYSE:GM) joint venture with China’s SAIC, has grabbed some of Tesla’s thunder in the world’s second-largest economy and biggest EV market.
And with Nio reportedly looking to enter Europe this year, Tesla’s market share has also slipped there. Specifically, the EV market share of Elon Musk’s company in Europe fell to 13.5% in the third quarter of last year, from 33.8% during the same period a year earlier.
Finally, Nio’s new ET7 electric car has received excellent reviews. Its maximum range is a stunning 620 miles, and one reviewer, for example, called the car’s design “clean” and “quite muscular,” labeled its cabin “spacious” and described the car overall as “a smart vehicle that will please all and offend none.”
Hard to Justify Current Valuation
In late December, I wrote that “for Tesla stock to beat the overall technology sector in the next few years, the company has to execute very well.”
I feel similarly about Nio stock. But Nio’s brand is still not nearly as strong as that of Tesla, while the valuation of Nio stock is meaningfully higher than that of the American company. As a result, I’m more skeptical about Nio’s ability to justify its current valuation, and I think that Nio’s shares could potentially fall much further than those of Tesla if things don’t go as planned for the Chinese company .
Still, as I’ve pointed out in past columns, successful automakers whose vehicles generate strong demand can make a great deal of money by “by selling software and services to the owners of [their] vehicles.” And Nio, in particular, is growing quite rapidly, while Tesla’s deceleration in Europe and China has given the Chinese company a good opportunity to greatly increase its market share.
The Bottom Line on Nio Stock
For Nio stock to climb much above its current levels, even over the longer term, almost everything has to go right for the company. Specifically, it will have to continue to rapidly gain market share and Tesla will have to keep weakening in China and Europe. On top of that, Nio will have to make a meaningful amount of money by selling software and services.
But luckily for those itching to buy Nio stock, the EV market in general and the company’s shares in particular are not as hot as they once were. In fact, Nio is about 15% below its 52-week high.
As a result, I believe that, within a month or two, Nio’s shares are likely to retreat meaningfully, giving investors a chance to buy them when their risk-reward ratio is much better than it is now.
On the date of publication, Larry Ramer held a long position in GM.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.