Compared to Tesla, Nio Stock Appears to Be 20% Too Cheap

Nio (NYSE:NIO) stock looks to be fairly good value here. This is because NIO stock is cheaper than Tesla (NASDAQ:TSLA) and has similar or better growth prospects and estimates. This should influence investors who are trying to decide whether to invest in one or both of these electric vehicle (EV) makers.

NIO stock: A shot from the outside of a Nio display room at night.

Source: Robert Way / Shutterstock.com

This has an implication for the target value of NIO stock. Based on a comp valuation with TSLA stock, NIO stock should trade 20% more at $51.80 if it will have the same valuation. This is despite the fact that Nio will have a higher growth rate.

Nio’s Growth Rates Compared to Tesla

In 2020, Nio made sales of $2,326.8 million. Analysts now expect Nio, the Chinese EV maker, will have significantly higher sales for 2021. According to Seeking Alpha, Nio is expected to generate $5.45 billion in sales this year, compared to a $5.41 billion estimate from Yahoo! Finance. So 2021 sales will be 134.2% and 132.5% over 2020 from both Seeking Alpha and Yahoo! Finance estimates, respectively.

But Tesla’s forecast results for 2021 show a lower rate of growth. In 2020 the EV maker had $31.536 billion in sales. But analysts covered by Seeking Alpha 2021 estimate sales of $49.11 billion, and $48.75 billion according to Yahoo! Finance. This implies growth in 2021 of approximately 56%.

In other words, Nio will have well over twice the growth rate of Tesla, at 133% on average vs. 56%, or a 137% faster growth rate.

A similar outperformance is seen for 2022. Nio is forecast to have a 63.7% growth rate to $8.92 billion in sales in 2022 according to Seeking Alpha. But Tesla is forecast to have just a 35.3% growth rate in 2022 to $66.48 billion in sales. This means Nio’s 2022 growth rate is forecast to be almost twice as fast as Tesla’s. The same is true using Yahoo! Finance numbers — Nio has about 89% faster growth.

So this should mean that Nio has twice as high a valuation metric as Tesla, right? Not so, as we shall see.

Nio’s Valuation Metrics Vs. Tesla

As of July 26, Nio stock has a market capitalization of $70.735 billion, according to Yahoo! Finance. I have found that Yahoo! Finance has the best calculation of market values. Tesla has a market value of $633.5 billion. We can use these to compare the two companies’ price-to-sales (P/S) metrics.

For example, for 2021, Nio stock has a P/S multiple of 13 times ($70.735 billion / $5.43 billion) and TSLA stock has P/S multiple of 12.9 times ($633 billion / $48.93 billion). So the two stocks have a similar P/S multiple for 2021.

The same is not true for 2022. Nio has a 7.9 P/S multiple ($70.735 billion / $8.92 billion). Tesla has a 9.5 times multiple ($633.5 billion / $66.48 billion). Tesla stock actually has a higher multiple than Nio stock.

This does not make any economic sense. You can see my point. Nio has a higher growth rate than Tesla but has a level 2021 P/S metric and a lower 2022 forecast metric.

Nio Stock and China

I suspect that some of this may be due to growing concern toward stocks from Chinese companies. People are selling their Chinese ADRs (American depositary receipts) because of the actions of the Chinese government. They see the government placing restrictions on many high-tech Chinese companies, especially those on foreign exchanges.

The Chinese Communist Party, is after all, by definition, anti-capitalist. So people are selling first and asking questions later. Could Nio stock get a similar treatment by the government?

Nevertheless, my view is that there is always a reason a stock gets cheap. This one is just as good as any other. In the end, it doesn’t matter, since the relative cheapness of Nio stock will likely work itself over time.

What Nio Stock Is Worth

Based on Tesla’s valuation of 9.5 times 2022 sales, Nio should have a market value of $85 billion (9.5 x $8.92 billion). This is 20% higher than its present market value. In other words, NIO stock is worth $51.80, 20% more than its July 26 price today of $43.17 per share.

Here is why. Nio should actually have a higher multiple, given its significantly higher growth rate, as I showed above. So just keeping Nio stock at the same multiple as TSLA stock provides some room for the political risk caused by Nio being a Chinese company.

On the date of publication, Mark R. Hake did not hold any position in any of the securities mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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