The stock market is near its all-time highs, despite the rising concerns over inflation and Federal Reserve rate hikes sooner than expected. Some high-profile growth stocks have performed extremely well, and electric vehicle stocks are in this category.
While this market rally is almost certain to leave some companies overvalued when compared to their underlying fundamentals, there is a major difference when it comes to selecting stocks for investing. Some stocks may be slightly overpriced, some may be at their fair value and some may be too overvalued. The stocks that are too overpriced are the ones to skip.
This article covers three electric vehicle stocks that I consider to be way too overpriced now and should be avoided. They are:
What do these electric vehicle stocks have in common? First of all, they are stocks of Chinese companies. Second, their valuation is too rich. And third, their financial performance based on key metrics – such as profitability and free cash flow – is poor.
Analysis shows these stocks veer far from valuation benchmarks. Some popular financial ratios to gauge stocks are the price-earnings ratio, the price-book ratio, profitability (such as the net margin) and free cash flow.
As a reference, MSN Money cites key financial ratios for electric vehicle stocks. They include price-sales at 0.98, price-book at 1.90 and price-cash at 8.07.
Let’s take a closer look at these three overvalued electric vehicles stocks.
Overvalued Electric Vehicle Stocks: Nio (NIO)
First on today’s list of overvalued electric vehicle stocks is Nio, which has a one-year performance of 542.86% and is down 9.52% in 2021.
I wrote an article about Nio last November where I said, “Nio stock has had a stellar 2020, but a closer look at its fundamentals suggest it is a speculative bet.” I also described NIO stock as “extremely overvalued.”
On the date of that article, NIO stock was trading around $50. It later crashed to about $31 per share, but has rebounded to around $49.
NIO stock does not have a P/E ratio as the company is posting losses. MorningStar lists its 2020 book value per share at 80 cents. The company’s operating and net margins were negative for the past three years,.
Also, there is an increasing number of shares outstanding, which means investors are facing negative stock dilution.
The following recent ratios indicate NIO stock is too pricey: price-sales 30.31, price-book 16.90 and price-cash flow 598.57.
Xpeng is next in our look at overvalued electric vehicle stocks.
XPEV stock is down 6.63% in 2021 but has rallied almost 30% in the past three months.
Investors who focus on the company’s sales growth for the last two years may be impressed with the numbers – 22,801.76% in 2019 and 152.06% in 2020. Revenue of just $1.47 million in 2018 increased to $846.73 million in 2020.
But revenue growth by itself does not mean much if the company cannot make a profit, post a positive return on equity and deliver positive free cash flow.
Further analysis of XPEV stock finds a lot of negative numbers, including negative free cash flow for 2018, 2019, and 2020. This means the company is burning cash.
Meanwhile, XPEV’s recent price-sales ratio was 38.74 and its price-book ratio was 6.30. These ratios are much higher than the relevant ratios found in the automobile and auto parts industry. This suggests the stock is relatively overpriced.
Overvalued Electric Vehicle Stocks: Li Auto (LI)
Last on this list of overvalued electric vehicle stocks, Li Auto is up about 0.35% in 2021. The stock has rallied significantly in the past three months, rising more than 25%.
The company also recorded a remarkable sales growth of 3,229.17% in 2020. Revenue also soared to $1.37 billion compared to only $41.15 million in 2019. But this explosive revenue growth failed to materialize into net profits.
LI Auto is another Chinese EV maker that is synonymous with high expectations and unprofitability. In 2020, the company reported a net loss of $24.05 million despite the surge in sales. The formula to produce positive operating income is still unknown to Li Auto. However, the company managed to produce positive free cash flow in 2020 – $357.08 million – for the first time in three years.
However, with increasing debt and no positive earnings per share, I see no reason to get excited.
LI stock has a price-sales ratio of 18.62, a price-book value of 5.91, and price-cash flow was 71.46. These ratios are multiples above industry benchmarks, suggesting an overvalued stock.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.