Is Nio Stock Overvalued?

Is Nio Stock Overvalued? Electric vehicles are widely regarded as relative newcomers to the auto industry. After all, gasoline-powered internal combustion engines have completely dominated the market since Henry Ford’s first Model T rolled off the assembly line more than a century ago.

However, the truth is that electric cars pre-date the Model T. In fact, the first car that Ferdinand Porsche ever developed was the P1 in 1898 – an electric vehicle. 

In the very earliest days of the auto industry, electric vehicles had the edge. Even Thomas Edison preferred them to cars with internal combustion engines, because electric vehicles were quieter, easier to operate, and free from smelly exhaust fumes.

However, consumers decisively chose gas-powered vehicles over electric alternatives for the same reason they do today: electric vehicles cost much more at the point of sale. 

In 1912, a Model T was roughly $650. An electric vehicle was closer to $1,750. In 2020, the least expensive new gas-powered cars are around $15,000.

The least expensive new electric and hybrid cars come in above $30,000. It’s obvious why electric vehicles are less popular among consumers, though it appears that sentiment is changing – albeit slowly. 

The price of electric vehicles is coming down, while technology advances steadily. Meanwhile, consumers are developing greater interest in the lower cost of electric vehicle ownership.

Perhaps more importantly, climate-related concerns are taking center stage, and more new car buyers are willing to pay a premium to prevent excess emissions. 

Chinese electric vehicle maker Nio is working hard to lead the change in electric vehicle adoption rates. In fact, some refer to the company as China’s own version of Tesla.

Over the past two years, the company has had dramatic ups and downs. As of early October, share prices are most decidedly up. Investors want to know if that progress is a sign of things to come, or is Nio stock overvalued. In other words, is Nio a buy? 

Why Nio Stock Went Up?

There is no gentle way to say it. Nio had a stunningly poor 2019.

At one point, shares were valued at just $1.36 each. Among other issues, Nio had to navigate battery fires and related recalls, competition from Tesla’s new Chinese factory, declining subsidies for electric vehicles, layoffs, and unsustainable financial losses.

The situation was so dire, many industry analysts believed that Nio was on the verge of total failure. 

Against all odds, Nio turned things around in 2020, and share prices increased steadily throughout the year – COVID-19 notwithstanding.

Nio has delivered record numbers of its luxury electric vehicles, and it is hard at work on a premium coupe SUV that is predicted to boost revenues even further.

Better yet, the company has improved its operating margins, and it isn’t losing money at the same unsustainable rate as it had in 2019. Each positive development drove share prices higher, and stock is now trading at more than $20. 

Investors who owned shares when they were at their rock bottom have added significant value to their portfolios over the past 12 months, which has them asking whether it’s time to cash out their profits or stick around for more growth.

Those who missed the meteoric rise wonder if buying in now will ensure they benefit from additional increases in stock value. 

The answer depends on whether Nio’s current upward trend will continue may lie in its earnings, which though still negative are rapidly approaching a breakeven point.

Often a transition from negative to positive earnings can catalyze a share price higher, and Nio may be no exception.

Is Nio Valuation Too High? 

The first nine months of the year have been kind to Nio – and to Nio shareholders – with stock prices increasing by 430 percent.

In September 2020 alone, shares went up by 11.5 percent after the highly-regarded Deutsche Bank announced its conviction that Nio’s growth is likely, both short-term and long-term. 

Deutsche Bank analysts project stock prices to reach $24 per share over the next year, and some believe Nio has potential to become China’s next iconic vehicle brand. If they are correct, it is highly likely that the company’s most optimistic growth projections can be met. 

Today, Nio’s market capitalization comes in at approximately $26.6 billion, a value that is about 12 times the expected sales for 2020. Given its prospects, the consensus is that Nio’s valuation is on-target. 

Will Nio Stock Drop?

While most industry experts consider Nio a buy, they agree that this stock carries higher-than-average risk.

In addition to internal issues that could disrupt revenues, such as new technological missteps, there is significant competition for electric vehicles in the Chinese market.

Another important consideration is the state of the world economy – both generally, and as it might impact China in particular. China’s GDP had already started slowing when the pandemic hit, and it is not yet clear how additional coronavirus developments might affect global markets. 

If any or all of these risks come to pass, Nio’s stock is likely to drop. The more important question is whether the company will recover quickly from any drop that does take place. For the moment, given Nio’s history of overcoming obstacles and meeting challenges head-on, the answer is a cautious yes. 

Is Nio Stock Overvalued? The Bottom Line

The bottom line is that most analysts believe Nio stock is fairly valued given the company’s growth prospects. However, Nio is a small organization that has a long way to go before it reaches a state of steady profitability – and there are plenty of ways for things to go wrong along the way.

Essentially, Nio should be considered a high-risk stock with potential for high long-term rewards. With that in mind, investors should carefully consider how much weight to give Nio within an otherwise diversified portfolio. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.