Here’s why I’m backing NIO stock to soar!

NIO stock is my top electric vehicle pick. The Chinese automaker has gained considerably over the last month, but I’m backing it to go further.

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Electric cars charging in station

Image source: Getty Images

NIO (NYSE:NIO) stock bottomed out in early May, having lost more than half of its value in the previous 12 months. However, as China reopened its economy in May, the stock gained considerably. It’s currently trading at $20 a share, up from around $12 a month ago.

However, $20 a share still looks like good value to me and I’m looking to buy more. Here’s why!

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Valuation vs peers

NIO looks cheap compared to other electric vehicle (EV) makers. Yes, NIO is yet to make a profit, and it doesn’t anticipate being profitable until 2024. But not many EV makers are profitable yet. Tesla is the exception to the rule.

But if I look at price-to-sales ratios, that’s where NIO looks cheap. The stock has a P/S ratio of around 5.5. Meanwhile, sector leader Tesla has a P/S ratio of around 13.5.

StockP/S ratio
Li Auto5.4

As we can see, NIO looks cheaper than its US peers. However, Li Auto, a Chinese peer which also produces non-electric vehicles, trades with a similar P/S ratio.

Tech superiority

NIO cars may not travel quite as fast as Tesla’s vehicles, but they’re not far off. However, they can travel further on a single charge. NIO claims that a version of its ET7 can go as far as 1,000km on a single charge, putting it some distance ahead of its Tesla equivalent. However, it’s worth noting that NIO uses different testing standards.

I’m also excited by NIO’s battery swapping technology. Owners can simply pop into a NIO-managed garage to swap their empty battery for a full one in a matter of minutes.

Changing conditions in China

China relaxing Covid-19 restrictions over the past month has been good for the NIO share price. Investors are less worried now about manufacturing delays. It also appears that China is adopting a new, more targeted strategy to contain Covid, which should cause less economic pain.

Meanwhile, the Hang Seng Index jumped 4% on Wednesday after Beijing approved 60 new gaming licenses. The move was seen as a signal by some investors that China’s 18-month-long crackdown on tech was coming to an end.

The crackdown, which mainly focused on soft tech, wiped $2trn in market value from the sector over the past year. Chinese stocks may now appear less risky as a result of Beijing’s latest move.

Will I buy more NIO stock?

So will I buy more NIO stock at $20 a share? Yes. I was fortunate to buy in at around $14, but at $20 I still think the business looks good value.

For me, NIO has great long-term potential and represents a real threat to Tesla’s market-leading position.

But while China has reopened over the last month, the Zero-Covid policy does worry me slightly. I understand Beijing will want to avoid locking down whole cities again and will take a more targeted approach. But Omicron is hard to keep out, so I’m a little concerned that there might be another lockdown or two on the way, and this could hurt production.

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James Fox owns shares in NIO. The Motley Fool UK has recommended Tesla. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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