Whenever I have covered NIO (NYSE: NIO) stock in the past, I have always tried to clarify that I think the company has potential. However, its valuation and corporate structure have scared me away.
But following the recent slump in the company’s share price, it is down around 60% over the past 12 months, I thought it might be worth taking a closer look at the business to see if its valuation has fallen to a more appropriate level.
NIO stock outlook
The question of whether or not the stock looks attractive at current levels is not particularly easy to answer.
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As it is not yet turning a profit, NIO is challenging to analyse. So rather than analysing the company’s bottom line, I will have to try and review the corporation based on its top-line sales growth.
Based on current Wall Street forecasts, the enterprise has the potential to report sales of around $4.5bn in 2021. This figure could rise further to nearly $10bn in 2022.
Of course, this growth is not guaranteed. Several factors will determine whether or not the firm will hit this target in the year ahead.
Demand for the company’s vehicles is high, but the group can only produce so many. It does not own its own factory. Instead, NIO’s vehicles are built in a plant owned by a joint venture between the firm and its manufacturing partner, state-owned automaker Jianghuai Automobile Group.
New facility
Capacity at this factory is limited, but the partners are in the process of building another facility. Progress is good, and it looks as if vehicles will start rolling off the production line in the second half of 2022.
On top of this, NIO plans to launch a further three new vehicles over the next 12 months. These new launches should open up the company to different markets. So it looks as if the demand will be there to meet the extra capacity available from the new facility.
At the time of writing, NIO stock has a market capitalisation of $33bn. If the group can generate total sales of $10bn by 2023, this suggests that the business is trading at a forward price-to-sales (P/S) multiple of around 3.3.
By comparison, peer Tesla is dealing at a P/S multiple of nearly 16.
Valuation gap
These two companies are not directly comparable. Nevertheless, I think these two valuations illustrate the price gulf between two firms that both make EVs. The Chinese automotive manufacturer looks dirt cheap compared to its US peer.
That said, there is no guarantee that the enterprise will be able to increase production capacity significantly over the next two years.
There is also still a question mark hanging over the company’s corporate structure. I think both of these factors warrant a lower valuation compared to Tesla.
Still, a discount of nearly 80% seems excessive.
Despite this gap, I will not buy the shares for my portfolio today. I would rather wait on the sidelines and see how NIO’s business evolves over the next 12 months and see if it hits Wall Street’s production targets. If it does, I will reevaluate the opportunity.
In the meantime, I think there are plenty of other attractively priced securities.
