Nio Inc (NYSE:NIO) recently released excellent third-quarter results on Nov. 9, making NIO stock look very undervalued. However, since then, NIO stock has been drifting lower — but this might not last next year.
The stock peaked at $43.20 on Nov. 8, the day before results came out. But as of Dec. 27, Nio stock was at $29.96. That’s $13.24 lower, representing a drop of more than 30% in just over a month and a half. However, I believe the stock is worth at least one-third more at $39.85 per share.
It almost seems as if the market did not hear the results correctly. Its deliveries for Q3 were 24,439 electric vehicles (EVs), up 100.2% year-over-year (YOY). Moreover, sales were up 102.4% YOY to 8.6 billion Yuan, or $1.3 billion. In other words, Nio has been doing extremely well in both sales and deliveries.
On top of that, its gross margin has been climbing. It rose to 20.3% from 18.6% in the second quarter. So why is NIO stock falling, and will this continue?
Where Things Stand With Nio
It’s hard to say why any stock falls, but I suspect that it has to do with year-end tax-loss harvesting. I don’t spend a lot of time worrying about why a stock falls, especially if it is in growth mode like at Nio.
For example, analysts surveyed by Seeking Alpha have an average forecast of $9.83 billion in revenue for next year. That represents a growth rate of 74.3% over analysts’ estimates for 2021 revenue of $5.64 billion.
I am not going to get too worried about a stock with a huge expected growth rate like that periodically taking a break. After all, a 74% expected growth rate in revenue is very significant. It means the company is still growing very quickly and the stock may have risen too far, too fast.
However, now it looks like NIO stock is trading at a relatively cheap forward price-to-sales (P/S) multiple. For example, as of Dec. 27, Nio’s market capitalization is $48.54 billion. Therefore, its P/S multiple is just 8.6 times for 2021.
Moreover, assuming that analysts’ 2022 revenue forecasts come to pass, its P/S multiple for 2022 is very cheap. At Monday’s $48.54 billion market value, it’s at 4.94 times 2022 forecast sales of $9.83 billion. This is a very cheap forward P/S ratio.
What Nio Is Worth
For example, right now Tesla (NASDAQ:TSLA) trades for 8.75 times its 2022 forward sales estimates. This makes it 77% higher than Nio in terms of valuation.
That means NIO stock is simply too cheap. Even if we were to handicap the par value P/S ratio by 25%, the true value should be at a P/S of 6.56x (i.e., 8.75 times 75% = 6.56x.)
Therefore, NIO stock should trade at 6.56 times its 2022 sales forecast of $9.83 billion, or $64.48 billion. That represents a 32.8% higher market value than its present market cap of $48.54 billion.
In other words, NIO stock is worth at least one-third more than its Dec. 27 price of $29.96. That puts its target price at $39.85 per share, or 33% higher.
What to Do With NIO Stock
Nio ended last year at $48.74, so it is down $18.78 year-to-date, or about 38.5%. That does not seem appropriate for a company that is going to have 74% higher sales next year.
This is the main reason I think there’s a good chance NIO stock will drift back up this year. At some point, the market may realize it has overdone the selloff.
At this point, it makes sense for value-oriented investors to either average down into their position or take a new stake in NIO stock. This is because you never know if the stock is at a trough at this point.
Even if gets cheaper, investors can buy more then. In fact, I have often found that once a stock like this reaches a trough that is undervalued, it does not stay there long.
As a result, look for NIO stock to rise at least one-third more over the next year. Now is the best time to take advantage of this opportunity.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
