Image source: Sam Robson, The Motley Fool UK
NIO (NYSE:NIO) stock’s down 22% over the past year. It currently trades at $3.82, which isn’t quite its 52-week lows, but is a long way from the highs above $7 from last October. With the electric vehicle (EV) sector in a critical period right now, some are looking at NIO being undervalued based on where the company could go. Here’s my take.
Valuation checks
Part of the story comes from valuation metrics. For example, the price-to-sales ratio for NIO is 0.88x. This is low, with the industry average estimated to be 1.33x.
I can’t use the price-to-earnings ratio because NIO’s loss-making. This in itself isn’t a great sign, because buying a stock that’s consistently losing money is a bit of a red flag anyway.
Next, I reviewed the enterprise value, which is an alternative metric to the market-cap to see what a company’s worth. If there’s a large discrepancy then this can indicate the share price is either undervalued or overvalued. Yet for NIO, the enterprise value’s almost exactly the same as the current market-cap.
So reviewing different valuation tools, I can’t say either way if the stock’s a bargain at current levels.
Fundamental views
A stock can be viewed as a bargain if an investor thinks the share price doesn’t reflect the optimism of what the future could hold. For example, NIO’s planning to launch the Onvo L90, a long-range mass-market EV under the sub-brand, later this year, with previews looking positive.
Additionally, an affordable EV under another sub-brand, Firefly, is planned to be released in 16 markets this year. This is focused more on urban customers. The potential for these vehicles to boost revenue and profitability could help to lift the stock price going forward.
The business is also continuing to push into new markets beyond China. Europe’s one growth area, as well as the potential in the UAE. Simply put, the more presence it has around the world, the larger the target market to buy the EV’s.
The bottom line
Even though the outlook appears positive, there are risks that could make investors stay away, despite the cheap price. The EV market’s highly competitive, with established players including Tesla and others. NIO’s ability to differentiate and maintain a competitive edge are crucial for sustained growth.
Europe in particular is seeing a slowdown in demand for EV’s. This impacts the whole sector, not just NIO. But it doesn’t bode well for the expansion push in a geography that has unstable demand.
Therefore, even though I think NIO shares are undervalued below $4, I don’t think it’s an unmissable bargain. I’d rather own a slightly overvalued share in a sector that’s growing rapidly than a potentially undervalued stock in a sector with a cloudy outlook.
