Nio (NYSE:NIO) stock remains very cheap compared to Tesla (NASDAQ:TSLA). This is based on its much faster growth rate and the NIO stock valuation compared to Tesla’s. I wrote about this in my last article in July. Unfortunately, this discrepancy has widened since then.
Since the end of July, NIO stock has actually fallen 21.6% from $42.62 per share to a trough of $33.40 as of Oct. 4. However, the market has finally started to relent against Nio stock. Since Oct. 4 it has risen 12.9% to $37.71 as of Oct. 15.
Moreover, investors in NIO stock are still worse off on a year-to-date (YTD) basis. The stock is actually down 25% YTD. But there does seem to be good hope that investors might come out ahead. This could happen if the stock starts to recoup the valuation discrepancy vs. Tesla.
Growth Differentials With Tesla
On Aug. 11 Nio reported that its sales rose 127.2% over the prior year. Its deliveries of electric vehicles (EVs) were up 112% to 21,896 EVs.
By contrast, Tesla reported Q2 sales up 98% over last year’s Q2. Deliveries of EVs were up 121%. So, compared to Nio, its sales growth was lower, but deliveries were slightly higher.
However, going forward, analysts expect much faster growth from Nio than Tesla. This obviously might be somewhat expected since Tesla is a much larger company. For example, Tesla’s market value of $844.5 billion vs. Nio’s market cap of $61.79 billion.
Moreover, analysts now expect sales in 2021 to rise to $5.63 billion, up 141.6% from $2.33 billion last year. This is according to Seeking Alpha‘s survey of 21 analysts.
But Tesla’s 2021 revenue is forecast to rise just 61.2% to $50.85 billion from $31.53 billion last year. This means that Nio’s 2021 growth rate is over twice that of Tesla’s (i.e., +141.6% vs. +61.2%).
This same pattern persists in analysts’ projections for 2022. For example, Nio’s 2022 sales forecast is for 67% growth to $9.4 billion, whereas Tesla’s is just 33.3% with 2022 sales of $67.79 billion.
Again, even 2022 analysts foresee over twice as high sales growth at Nio (i.e., +67% vs. 33.3%). So, one might expect that Nio has a much higher price-to-sales (P/S) multiple than Tesla.
Nio’s Valuation Vs. Tesla
But the truth is the opposite. In fact, Tesla’s valuation using a P/S metric has widened over Nio.
Here are the numbers. Nio’s P/S multiple is 11 times for 2021. Tesla’s P/S ratio is 16.4 times. Again, both of these use the figures above and Seeking Alpha’s survey of analyst estimates. Tesla’s multiple is 49% higher.
For 2022, Nio has a P/S multiple of just 6.6 times, vs. Tesla’s 12.3 multiple. This differential is even higher than the 2021 comparison (+86.3%).
So, we have a paradox. Nio has much higher growth rates, but Tesla has much higher valuation ratios. This is not likely to last. The most likely scenario is that the valuation metrics will converge, with Tesla’s P/S rate falling and Nio’s rising.
What Nio Stock Is Worth
Therefore, let’s assume that Nio stock will pick up half of the valuation differential. So for 2021, it will rise to a P/S value of 13.7 times and for 2022 it will have a P/S of 9.45 times. These are half the difference in P/S values between the two stocks.
So for 2021, we multiply 13.7 times the 2021 sales estimate of $5.61 billion and derive a target market value of $76.86 billion. Doing the same for 2022 results in a target market value of $88.83 billion (i.e., 9.45 x $9.4 billion).
Now we have two valuation estimates ($76.86 billion and $88.83 billion). Assuming that the market is likely to eventually favor the higher estimate, let’s take 70% of the higher and add to it 30% of the lower estimate. That results in a weighted average target value of $85.24 billion (i.e., $62.18 billion + $23.06 billion).
This valuation of $85.24 billion for Nio is 37.9% higher than its present market value of $61.79 billion. That implies that Nio stock is worth $52 per share (i.e., 1.379 x $37.71, the price as of Oct. 15).
What to Do With Nio Stock
Here is the bottom line. If we compare both companies’ growth rates, Nio stock is worth at least 37% more at $52 per share.
This means that investors in the EV sector might want to spread out their portfolio and put some of their position in Nio stock. Given its superior growth rates and bargain price, Nio will likely produce a good return for value investors.
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.