Nio Inc (NYSE:NIO) recently released excellent second-quarter financial results on August 11, making NIO stock look very undervalued. I believe that NIO stock is worth at least $45.68 or over 19% higher than Sept. 13’s price of $38.39.
NIO stock has had a difficult year so far. It ended 2020 at $48.74 and is now down 20% year-to-date (YTD). In fact, Nio stock peaked at $62.84 on Feb. 9 and it drifted down to a low of $31.22 on May 13. Since then it has floated up almost 23% to $38.39 on Sept. 13. But as I say, I think it can go much higher.
Nio’s Q2 Financial Results
Nio’s electric vehicle (EV) deliveries were up 111.9% over Q2 2020 and up 9.2% over Q1 2021. At that quarterly pace over the next 12 months, on a compound basis, its deliveries will be up 42.2% year-over-year (YOY) in one year. This implies a potential slowing of its growth rate, but that might also be expected given its higher base now.
Its gross margin fell to 18.6%, up from last year, but it was down from 19.5% in Q1. Moreover, the company is still booking losses. Its loss from operations was negative $118.2 million and its net income loss was negative $90.9 million.
So far analysts do not expect the company to make any profits until 2023, at least according to Seeking Alpha.
Valuing Nio Using Price-to-Sales
As a result, the best way to value NIO stock is to use a price-to-sale (P/S) methodology. For example, Tesla (NASDAQ:TSLA) has a P/S multiple of 14.5 times sales for 2021 and 10.7 times for 2022. This is much higher than Nio’s multiples. NIO stock trades at 7.6 times 2021 sales and just 4.6 times 2022 revenue forecasts.
Granted, Nio should probably have a lower P/S multiple, given that it is not yet profitable. But, as I pointed out last month, its sales are growing faster than Tesla. As SeekingAlpha projects, Nio’s 2022 sales of $9.36 billion vs. $5.62 billion this year shows a 66.5% gain next year. Tesla’s sales are forecast to grow 35% from $50.33 billion to $68 billion in 2022.
So, if we gave it a 25% haircut from Tesla’s P/S ratios, NIO stock should trade at 10.875 times 2021 sales and 8 times 2022 forecasts. For example, Nio’s target value should be $61.118 billion for this year (close to today’s $62.9 billion market value).
And using a multiple of 8 times 2022 forecast sales of $9.36 billion results in a target market value of $74.88 billion. That represents a potential upside of 19% over today’s market value.
Therefore, NIO stock is worth $45.68 per share, up 19% from today’s price.
What To Do With NIO Stock
Analysts are generally very positive on NIO stock. For example, TipRanks indicates that 6 Wall Street analysts that have written on the stock in the last 3 months have a $67.52 average price target. This is 75% over today’s price of $38.39.
Moreover, Yahoo! Finance, which uses Refinitiv analyst survey data, reports that 18 analysts have an average price of $60.25. This is over 56% higher than today’s price. Lastly, Seeking Alpha reports that 22 Wall Street analysts have an average price target of $61.55, or over 60% higher.
In other words, my projection for a 19% gain is probably too low, given what analysts are saying. But until the company is able to move in profit status, NIO stock will likely have a lower multiple than Tesla.
As a result, now might be a good time to begin taking a small stake in NIO stock. You might have to average cost down into the shares, as profits are not forecast to occur until 2023.
As I wrote last month, some of its valuation discount could also be due to the fact that Nio is a Chinese stock. They are on sale lately, especially given the Chinese government’s crackdown on technology stocks. Over time, this is likely to ease, and with it, the stock price. Until then, investors can rely on our minimum estimate that NIO stock is worth 19% more or $45.68 per share.
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.