The past month has been a great one for NIO (NYSE:NIO). The electric vehicle manufacturer has gained 17% in value over this time period, breaking above $10. However, it’s still down 45% over the past year. With NIO stock a far cry from the $20 price from last August, is this a realistic level for potential investors to target?
Reasons for optimism
One of the reasons that helped to boost the share price recently has been strong production and delivery numbers from competitors. For example, Tesla Q2 delivery numbers came in at 466,140, a jump of 83% year on year. Rivian also posted a strong trading update, with it being on track to hit production of 50,000 this year.
This has helped to buoy the NIO share price, as investors assume that this is an industry-wide demand trend.
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Another factor aiding the gain came from confirmation of a $738.5m investment from CYVN Holdings, an Abu Dhabi government-owned business. The Chairman of CYVN commented that it was committed to “providing strategic value that will support NIO’s international business growth“. Such help could support and accelerate growth for not only NIO, but also for the share price.
A potential rise to $20
From the current price, we’re talking about almost a 100% gain to reach $20. Yet this isn’t unrealistic, as it traded close to $60 back in early 2021.
I can’t use some traditional financial metrics to assess valuation as the business is still posting losses. However, I can look at tools that don’t use earnings, such as the price-to-sales ratio. This measures the share price relative to revenue (sales) per share. A low figure indicates a potentially undervalued stock. Currently, NIO has a ratio of 2.51. In comparison, it’s 11.52 for Tesla. So even if the share price doubled to $20 with the same sales figure, it still wouldn’t be overvalued relative to an industry peer.
Let’s not get ahead of ourselves
Despite the calls that the stock is still undervalued, the financials do concern me. The Q1 2023 results revealed a gross profit of just $23.6m. This is the lowest level since Q1 2020, which isn’t good as it doesn’t show progress.
The gross margin of 1.5% is lower than the 3.9% from Q4 2022. It’s at the level now where it really needs to hold or move higher, as a negative margin is a big red flag.
On balance, I do feel that the stock can reach $20 over the next year. Yet I believe this is going to be driven by revenue growth and investor optimism about the future for the business. I don’t think it’ll be driven purely by company profits, as in recent months the figures have been poor yet the stock hasn’t materially fallen.
