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NIO Stock: Good Valuation Relative to Growth

NIO Inc. (NIO) is a leading Chinese EV company that keeps growing at a rapid pace, and has managed to create a strong brand that is sought after in its home market.

At the same time, NIO looks inexpensive relative to how Tesla (TSLA) is valued, although it should be noted that NIO is not profitable yet.

Also, its shares are expensive relative to how most legacy auto companies are valued, which is why I am neutral on the stock today. (See Analysts’ Top Stocks on TipRanks)

Attractive Growth in Home Market

NIO offers a range of different models, including the EP9 sports car, the ES8 SUV, the ET7 sedan, and the ES6 and EC6 SUVs.

While NIO primarily sells those in its home market of China, sales outside of China have just begun in Europe.

NIO has managed to grow its sales volumes at a highly attractive pace over the last couple of quarters: During the first quarter of the current year, revenue was up more than 500% year-over-year, although the impact of the pandemic during the previous year’s Q1 made for an easy comparison.

Even during the second quarter, when the comparison was more telling, NIO still managed to grow its top line by more than 140% year-over-year, however.

NIO generated revenues of $1.2 billion and $1.3 billion during Q1 and Q2, respectively, and it is expected that revenue has hit a new record in Q3 (results have not been reported yet). During the month of September, NIO managed to deliver 10,628 vehicles, which was a record number for the company, and which positions the company well for strong quarterly results.

It was also a 125% year-over-year improvement, and NIO also was able to rebound from somewhat weaker deliveries during August — NIO’s management blamed that month’s weak sales numbers on the global chip shortage that plagued most automobile companies.

With NIO’s sales improving by 80% in September, relative to August, it looks like the headwinds from the global semiconductor shortage are waning, however.

NIO is forecasted to see its revenue grow to $5.6 billion this year, which seems like a very achievable goal, since a little more than $2.5 billion has already been locked in during H1.

With ongoing sequential improvements, generating a total of $2.9 billion during Q3 and Q4 should be an achievable target. Beyond 2021, the growth outlook remains very healthy.

Analysts are currently predicting that NIO will generate revenues of $9.4 billion in 2022 (67.1% growth versus 2021), and $13.6 billion in 2023 (45% growth versus 2022).

Cheaper Than Tesla

Growth has its price, and it is thus not surprising to see that NIO trades at a steep premium relative to the valuations most legacy automobile companies trade at.

It is more telling to look at a comparison to Tesla, however, and NIO does not look too bad on that front. NIO trades at 7.5x next year’s expected revenue, while Tesla is currently valued at 13x.

One can argue that Tesla deserves a premium due to its established profitability and first-mover advantage, but on the other hand, one can also argue that NIO should trade at a premium due to its higher expected growth.

Turning to Wall Street, NIO has a Strong Buy consensus rating, based on the seven unanimous Buys assigned in the last three months. At $62.44, the average NIO price target implies 71.9% upside potential.

Disclosure: At the time of publication, Jonathan Weber did not have a position in any of the securities mentioned in this article.

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