As the NIO (NYSE: NIO) share price has cratered over the past few weeks. So I’ve been trying to determine how much the company’s worth.
I’ve been taking a closer look at the China-based business because I think electric vehicles (EVs) are the future, especially considering the amount of money and time governments worldwide are spending on increasing their uptake. And there are hundreds of different ways investors can buy into this theme.
The NIO share price opportunity
NIO is one of the largest and most visible EV manufacturers in the world. It also has a strong foothold in the Chinese market. This is projected to be one of the biggest markets for EVs for the foreseeable future.
And as well as these positive qualities, I’m also attracted to the company’s technology. In particular, the group’s replaceable battery packs are unique in the sector and overcome a significant drawback all electric cars have so far struggled with, namely range.
By quickly replacing batteries on a long journey, using an EV becomes just as straightforward as driving a petrol or diesel car on a long trip.
Still, despite the operation’s desirable qualities, it’s still losing money. In the second quarter of 2021, NIO lost nearly $91m on sales of $1.3bn.
A relatively small company
This is where it becomes challenging for me to place a value on the NIO share price. Yes, the firm owns some exciting technology, but it still isn’t returning a profit. It also remains just a speck on the global automotive industry landscape.
To put its size into perspective, European automotive giant Volkswagen earned $6bn in the second quarter of 2021 on revenues of around $80bn.
NIO’s growth could also be threatened by Chinese policymakers, which have recently been clamping down on the country’s technology sector. This is one of the reasons why investors have been selling the NIO share price recently. There’s no telling which company regulators will move onto next.
Considering all of the above, how does the company’s valuation compare to a close peer like Tesla? Well, using the price-to-sales (P/S) ratio, which is one of the best ways to place a value on a loss-making company, Tesla is trading at a forward P/S ratio of 14. Meanwhile NIO is selling at a ratio of 11.
These comparison metrics appear to show the NIO share price is undervalued.
The bottom line
As such, I think that in the perfect world, the stock could be worth more than its current value, based on the comparison with Tesla.
Unfortunately, this is currently an incredibly uncertain time for Chinese companies listed in the US. Therefore, I wouldn’t buy the stock today. I think it’s just too difficult to establish its future potential.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc., Tesla, and Volkswagen AG. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.