Nio (NYSE:NIO) is now trading around $44, down just under 10% from where it ended last year ($48.74). I suspect that NIO stock will continue to move higher as the Chinese electric vehicle (EV) industry grows from strength to strength.
In fact, when I wrote about Nio last month it was at $33.81. I argued that the company was worth about $38.58 at the time, even though I knew it was at or close to a trough. Since then NIO stock has risen above my target price.
I based my previous target price on my estimate that Q2 revenue will be about $1.281 billion, or 5.2% higher than Q1 on a QoQ basis. The company itself forecasts that revenue will be between $1.243 billion and $1.298 billion in Q2. So I have decided to look at the bigger picture and base my valuation on a longer-term view.
What NIO Is Worth Now
One way to do this is to rely on analysts’ estimates for revenue. It is sort of a simple cop-out, avoiding having to build my own model for the company. But let’s face it, most of the valuation factor comes in the multiple, not so much the actual forecast numbers.
For example, let’s use analysts’ estimates for 2022 projected revenue. According to Seeking Alpha, their average 2022 sales forecast is $8.84 billion. Yahoo! Finance has an estimate of $8.78 billion. These are higher than the $7.94 billion forecast in my model last month. In other words, analysts have raised their forecasts by 11.33% in the space of one month. That is partly why NIO is worth more and it’s moving up.
Moreover, the biggest decision in valuing NIO stock is what multiple to use. For example, let’s look at Tesla (NASDAQ:TSLA), its main rival in China in the sale of EVs. TSLA stock trades for 8.73 times its 2022 sales forecast, according to Seeking Alpha. In addition, at $577 billion in market value, Tesla is 6.89 times its 2023 forecast of $83.7 billion in sales.
So applying this to NIO stock, the market value at 8.73 times $8.81 billion (the average 2022 estimate) is a market value of $76.91 billion. Nio’s 2023 sales forecast is $12.83 billion. Using Tesla’s 6.89 multiple gives it a 2023 value of $88.4 billion.
The bottom line is that Nio is worth on average $82.65 billion. This implies that it’s worth 13.6% above its $72.75 billion market value today. The equivalent value for NIO stock is $49.98 per share, i.e., 13.6% above today’s price (June 9) of $44.
What To Do With NIO Stock
Of course, this valuation model, as simple as it is, and standing on the work of analysts’ sale models, also equates Nio to Tesla. There is no particular reason why Nio should have the same valuation multiple. Moreover, in all intellectual honesty, we are projecting out sales for over 2 years from now and that requires a discount mechanism.
So, to simplify things and to give Nio a slight discount, let’s use 90% of the multiple for 2023. Let’s also use a 5% discount for the present value of money for two years.
Here is how that would work mathematically. The 2-year discount factor at 5% works out to 90.7% of its 2023 $12.83 billion sales discounted to the present. That equals $11.6368 billion. Then, applying 90% of Tesla’s 6.89 multiple results in a market value of $80.177 billion. This is 10.2% above its market value today and is equivalent to a price for NIO stock of $48.49.
That is my best guess for NIO stock’s value. But keep this in mind. Stock prices don’t just stay at the price of what a company is worth. They gyrate well below to much above what a stock is worth. For example, as the company’s operations improve, NIO stock could trade well above its 2023 value of $48.49. Therefore, investors in NIO stock should likely make a better ROI than my projection.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.