Electric vehicle maker NIO (NYSE: NIO) is a stock that’s getting a lot of attention right now. Last week, NIO was the fourth most bought stock on Hargreaves Lansdown.
It’s not hard to see why its shares are popular at present. News from the company is encouraging and its share price is soaring (900%+ year to date). Some investors believe NIO could be the ‘Tesla of China.’ Should I buy some stock myself? Let’s take a look at the investment case.
NIO stock: what’s all the fuss about?
NIO is a Chinese electric vehicle (EV) manufacturer headquartered in Shanghai. The company, which describes itself as “the next generation car company,” develops premium smart electric cars that feature advanced technologies such as artificial intelligence. NIO isn’t the largest EV manufacturer in China. However, like Tesla, it’s seen as a very fashionable brand.
Source: NIO Inc
Strong trading update
A trading update last week showed the Chinese company has a lot of momentum right now. NIO said that in October, it delivered 5,055 vehicles, an increase of 100% year-on-year. Meanwhile, it delivered 31,430 vehicles for the 10 months to the end of October, up 111% year-on-year. As of 31 October, cumulative deliveries of its ES8, ES6 and EC6 vehicles was 63,343. The company is set to report its Q3 results on 17 November.
No profits
Looking at the financials, it’s clear its top line is expanding rapidly right now. Last year, revenue was $1.12bn. This year, it’s expected to be around twice that at $2.25bn. Next year, revenue is forecast to be $3.98bn. That’s impressive growth.
It’s important to understand however, that the company isn’t yet making a profit. Last year, it generated a net loss of $1.6bn. This year, Wall Street analysts forecast earnings per share (EPS) of -70 cents. Next year, they forecast EPS of -42 cents. This lack of profits adds risk to the investment case, particularly when you consider the company has a market capitalisation of nearly $60bn at present.
High valuation
Zooming in on the valuation, NIO shares currently have a forward-looking price-to-sales ratio of about 26.7. That’s expensive. Tesla, by contrast, currently trades on a price-to-sales ratio of about 13.3. Given that many analysts consider Tesla to be overvalued, it’s fair to say NIO stock isn’t cheap.
Short interest
Investors should be aware that since NIO’s share price has jumped recently, short interest has increased. According to data from 2iQ Research, short interest jumped 23% on 4 November. This indicates that hedge funds anticipate a share price fall. I see this as bearish.
A top UK tech investor owns NIO
However, my findings are not all bearish. It’s worth pointing out that NIO is a top holding in the Scottish Mortgage Investment Trust. Given SMT’s track record when it comes to picking tech winners (it’s made billions from Tesla and Amazon), I see this as a bullish sign.
NIO stock: my view
Overall, I think NIO looks interesting. Considering the market for electric vehicles in China is expected to boom over the next decade, I think it has potential. However, its valuation is high and the lack of profits adds risk.
All things considered, I’m going to keep NIO shares on my watchlist for now. At the moment, I think there are better growth stocks to buy.
