When I last covered NIO (NYSE: NIO) stock in late November, I said there were a few things that concerned me. At the time, the stock’s valuation was quite high and short interest was rising. I concluded there were safer stocks I could buy.
That was a good call in the short term. Over the following week, NIO’s share price fell more than 25%. However, this year, NIO shares have surged on the back of renewed interest in electric vehicle (EV) stocks. So, let’s take another look at the investment case. Is NIO a stock I should buy for my portfolio today?
NIO stock: the investment case
Recent updates from NIO have certainly been impressive. In early January, the company said it had delivered a total of 43,728 vehicles in 2020. That represented a year-on-year increase of 113%.
In early February, the company also told investors it delivered 7,225 vehicles in January 2021. That represented a year-on-year increase of 352%.
It’s also worth noting that on 9 January, billed as ‘NIO Day’, the company unveiled the NIO ET7 – its flagship sedan – as well as a 150kWh battery pack.
Looking at these updates, it’s clear the company is growing rapidly right now and has significant momentum.
But the thing that concerns me about NIO is the level of competition it could face. Increasingly, I’m seeing both traditional auto manufacturers and technology companies make serious moves into the EV space.
For example, earlier this week, tech powerhouse Apple said it’s close to finalising a deal with Hyundai-Kia to manufacture Apple-branded autonomous EVs. The so-called ‘Apple Car’ is scheduled to go into production in 2024.
Meanwhile, last month, Chinese tech giant Alibaba launched a sedan with wireless charging under a joint venture named Zhiji with SAIC Motor – the largest car maker in China. Artificial intelligence is at the heart of the developments, according to the company.
SAIC, which partners with Volkswagen and General Motors, also said last year it plans to have nearly 100 ‘new energy’ models by 2025. These include EVs as well as plug-in hybrid and hydrogen fuel cell vehicles.
Does NIO have enough of a competitive advantage to fight off all this competition? I’m not sure at this stage.
NIO vs Tesla
Turning to the valuation, NIO currently sports a market capitalisation of about $90bn. While that’s a lot lower than Tesla’s market-cap of $810bn, I still see it as quite high.
Wall Street analysts expect NIO to generate revenue of CNY31980 this year, so that puts the stock on a forward-looking price-to-sales (P/S) ratio of about 19 at the moment. By comparison, Tesla (which I’d argue has more of a competitive advantage than NIO due to its brand power) currently trades on a P/S ratio of about 17.
Meanwhile, Tesla sold 499,550 cars last year, putting its valuation at $1.6m per car sold. NIO sold 43,728 cars, putting its valuation at $2.1m per car sold.
Looking at these numbers, I continue to believe there’s some valuation risk here. If future performance is disappointing, NIO stock could fall.
NIO stock: should I buy?
All things considered, NIO stock is a bit too risky for me right now. I think there are other, slightly safer, growth stocks I could buy for my portfolio at present.
Edward Sheldon owns shares in Apple. The Motley Fool UK owns shares of and has recommended Alibaba Group Holding Ltd., Apple, and 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.