Back in 2020, NIO (NYSE:NIO) was the talk of the electric vehicle (EV) market. Although it is seen as the Tesla of Asia by many, the share price has struggled to move higher in the past year. In fact, NIO shares are down 74% over the past 12 months. Yet with some positive signs starting to emerge, here are a few reasons why my opinion on the company is changing.
China Covid-19 policy
Over the past week there have been reports that China is going to ease off on its current policy of aiming for zero Covid-19 cases. It’s the only major country I know of that still has very strict restrictions in place. This has hindered supply chain operations and NIO’s general manufacturing ability. I feel this is one major reason for the share price fall over the course of 2022 so far.
However, things appear to be getting better. Last week NIO confirmed that it had resumed production for two factories in the eastern city of Hefei. Even though broader China reopening optimism might lack concrete information, investors are clearly starting to sense something could change soon. This definitely contributed to last week’s 23% rise in the share price.
Comparing valuation to Tesla
Given the share price tumble so far this year, I think the stock could be undervalued. For example, consider how it compares to the other EV giant, Tesla. NIO generated revenue in the last reported year of $6.2bn. For Tesla, revenue in the 2021 fiscal year was $53.8bn. The market capitalisation of Tesla is $604bn. For NIO, it sits at just $17.64bn.
I get that I also need to delve into the profitability of both companies, the debt on the balance sheet and various other financial points before making a concrete judgement call. Yet it’s clear to me that based on the size of each company based on sales, the NIO market capitalisation (and therefore the share price) is low. If NIO had 10 times the revenue, it would be larger than Tesla, yet the market value would need to 34 times higher for it to have the same value.
NIO shares to diversify my portfolio
Finally, buying NIO stock allows me to get direct access to Asia as a market. Parts of Asia are still showing sluggish growth due to Covid-19 restrictions. This is a risk. But if these issues get resolved in coming months, exposure to this part of the world could be a smart play.
I’m not saying I’m going to snap up NIO shares today, as I think there are still clear risks. But I’m putting it on my watchlist as I think we could be close to the bottom for the share price.
