There has been a lot of chatter over the past month about electric vehicle (EV) producer NIO (NYSE:NIO) shares. It has tied in with the broader story of the potential benefit from the reopening of China via relaxing Covid-19 restrictions.
Given NIO stock’s move lower over the past year, I want to to see if we’ve reached the bottom and if now is the time to swoop in for a cheap buy.
A falling share price doesn’t always mean value
As the below chart shows, NIO shares are down 62% over the past year. Even though this seems like a large fall, it’s important for me to compare this to other firms in the same sector. Within the EV space, Tesla is the most natural comparison.
Tesla shares are down 50% over the same period. This highlights to me that NIO shares have performed worse but, at the same time, indicates the sector as a whole has struggled this year. It’s also true that the EV sector is tagged as a high growth area.
Given the slowdown in global economic growth in 2022, expectations for sales and profits have been cut. This is another factor that has caused investors to re-price the value of NIO and Tesla shares.
Therefore, the fall in NIO stock alone doesn’t mean it’s good value for me to buy now. Some of this move lower is justified, based on the economic outlook.
Finding value versus peers
Given that NIO is currently running at a loss, I can’t use the traditional price-to-earnings ratio to try and find value. Rather, I can use the price-to-book value. This compares the share price to the book value of the stock. The book value refers to the net value of the company assets on the balance sheet.
The chart below shows the figures for four US EV manufacturers.
NIO Price to Book Value data by YCharts
From this I can see that NIO does have a better P/B value than Tesla. It’s similar to Lucid, but not as low as Rivian. Usually, the lower the figure, the more undervalued a company is.
However, Lucid and Rivian are at earlier stages of production than NIO. So if I again revert back to Tesla vs NIO, the latter does offer me better value.
My conclusion on NIO shares
Despite the large fall in NIO stock this year, I feel a good portion of it is warranted. This is due to the political and social risk associated with production in China. Further, the gloomy economic picture has naturally caused investors to move away from growth stocks and towards defensive options.
However, when I compare it to other stocks from the same sector, I do feel it has the best value right now. It seems I’m not alone in this thought, with the share price gain over the past month outstripping rivals, shown in this chart.
I’m going to see how things pan out in China over the coming week or so, with the aim of investing some of my money in NIO.
