NIO (NYSE: NIO) Stock’s Stratospheric Bull Run Is Widening Its Valuation Gap With Tesla
NIO (NYSE:NIO), a promising EV manufacturer that is competing directly with Tesla (NASDAQ:TSLA) in China, has embarked on a record bull run that has seen the stock reach record highs successively over the past couple of days. With no apparent end in sight to this epic ramp up, concerns are mounting regarding NIO’s yawning valuation gap with Tesla.
As we detailed on Monday, on a fundamental level, two factors are responsible for pushing NIO to all-time highs. Firstly, NIO shares are benefitting from very healthy growth in Q2 deliveries, registering an annual increase of 190.8 percent and culminating in the delivery of 10,331 EVs. In June alone, NIO delivered 3,740 EVs, consisting of 2,476 ES6s and 1,264 ES8s, thereby, establishing a new monthly record. What is even more astonishing is the fact that these gains are being accumulated in a macroeconomic environment that is far from ideal and scarred by the financial retrenchment associated with the ongoing coronavirus (COVID-19) pandemic.
Secondly, NIO is rapidly shoring up its finances with the help of a series of cash injections, allaying fiscal concerns in the process. As an illustration, toward the end of June, the company disclosed that its investors have largely completed the requisite cash injection. Specifically, NIO (Anhui) Holding Co. Ltd. – the EV giant’s holding company – has already received 4.8 billion renminbi in funding with the residual 200 million renminbi expected to materialize by September 2020. Moreover, NIO revealed in a filing back in June that Tencent Holdings bought 1.68 million ADS (American Depository Shares) via a secondary share offering, raising Tencent’s total stake in the company to 15.1 percent. As a refresher, ADS is a share of a foreign company that is available for purchase on an American stock exchange and is quoted in U.S. dollars. Given NIO’s attraction of substantial liquidity from investors in recent months, concerns about a cash crunch are at historic lows.
This brings us to the crux of the matter. Year to date, NIO shares have risen by a whopping 292 percent, based on the current price of $14.56 as of 09:56 a.m. ET. This epic surge has naturally stretched NIO’s valuation metrics with respect to its peers. As an illustration, Tesla is currently trading at a trailing 12-month Price/Sales multiple of 9.9x. NIO, on the other hand, boasts of a trailing 12-month Price/Sales multiple of 14.6x (source: Koyfin). Bear in mind that Tesla has also recorded a year-to-date gain of 225 percent, crossing the $1,400 level for the first time today. While noting that the entire EV space has been ramping up lately, NIO’s surge is still an outlier. Consequently, if we were to take Tesla as a benchmark when it comes to the Price/Sales multiple, NIO should be trading at $9.87, constituting a downside potential of 32 percent relative to the current price level of $14.56.
This analysis does not, however, contend that a plunge in NIO’s stock price is imminent. Rather, equity markets are notorious for remaining detached from fundamentals for long periods of time. Our purpose is only to highlight the yawning valuation cliff and the need for investors to adopt a modicum of caution going ahead.
The writer does not hold any long or short position in NIO
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