Although Ideanomics (NASDAQ:IDEX) has plenty of potential and IDEX stock has retreated sharply recently, the stock’s valuation remains too high in the current, more cautious environment.
Specifically, the shares of Ideanomics are still trading at a very large trailing price-sales ratio. Focusing on China, Ideanomics is a holding company that focuses on the EV sector.
Ideanomics Can Exploit the Rapid Growth of EVs in China
As I noted in my previous column, published on Dec. 15, Ideanomics links ” fleet operators that need to purchase large numbers of vehicles and manufacturers of electric vehicles (EVs).” The firm also brings together “businesses looking to buy EVs with financing companies and makers of chargers for EVs.”
In the prior article, I pointed out that China’s EV market was expanding quickly. Since then, more evidence of the growing strength of the country’s EV sector has come to light. For example, Chinese EV maker Xpeng (NYSE:XPEV) recently reported that, last quarter, its deliveries had soared 303% year-over-year and 51% quarter-over-quarter. Further, the EV maker’s top line jumped 345% YOY in Q4 Meanwhile, Tesla’s (NASDAQ:TSLA) February deliveries climbed 18% versus January, even though the important Chinese New Year holiday fell during the month.
Also very bullish for Ideanomics is the fact that research firm Canalys predicted that overall Chinese EV sales would jump “by more than 50%” in 2021.
Ideanomics’ Strategy Makes Sense
The company appears to be skillfully and intelligently avoiding the most competitive parts of the EV sector. Specifically, the most crowded part of the sector appears to be the manufacturing of higher-end EVs for consumers. Ideanomics does not appear to be significantly involved in that business.
Instead, in addition to the “middle-man” activities that I described earlier, the company has bought stakes in an electric tractor maker, a producer of EV chargers, and a maker of E-Bikes. It also has a unit that makes battery-electric and fuel-cell trucks.
Importantly, recent data indicates that the company’s strategy is working. Specifically, it delivered 439 EVs in December, up 166% from November. And in Q4, it delivered 706 EVs, an increase of 13% versus the same period a year earlier.
Moreover, the delivery data does not include the deliveries stemming from a deal that Ideanomics made with BYD (OTC:BYDDF) and Didi Chuxing. Under the contract, Ideanomicvs will buy 2,000 EVs from a joint venture of BYD and Didi. Ideanomics is poised to deliver the EVs to drivers that provide ridesharing and taxi services, starting in the first half of this year, the company indicated.
The Valuation of IDEX Stock Is Still a Problem in the Current Environment
The stock’s price-sales ratio, based on Ideanomics’ top line over the 12 months that ended in September, is 36. That’s extremely high, especially for a company that’s not really in the high-tech space. Further, with interest rates climbing, investors are becoming much more skeptical about companies with high valuations in general and EV firms with extremely high valuations in particular.
The Bottom Line on IDEX Stock
Another InvestorPlace columnist Louis Navalier, has a stellar stock-picking record. He recently wrote that Ideanomics “now has a winning formula” and predicted that the stock’s ” overall trajectory is going to be upward as more money flows into the EV market.”
I don’t disagree with Navalier’s conclusions. I continue to believe that given the high valuation of IDEX stock and the current investing environment, shares are likely to drop sharply before they rebound. Therefore, although this is a tough call to make, I still believe that investors should wait for another pullback in the name before buying the shares.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer 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. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been Roku, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.