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Is NIO’s Valuation a Bull Trap or a Screaming Buy?

Is NIO’s Valuation a Bull Trap or a Screaming Buy?

NIO Inc. NYSE: NIO has recently been a prominent fixture in the news cycle, with voluminous articles and analyst reports attempting to shed light on the company’s future. Like most Chinese stocks in the current geopolitical climate, its future is contentious. While bulls see an undervalued opportunity, bears state that the risks are too high, further marred by production slowdowns, COVID-19, and the steep sell-off in its stock price. This week, MarketBeat reported that NIO is in the top 20 stocks on the Robinhood trading app, so it warrants further analysis to see if its valuation makes it an attractive buy.

The Bull Case for NIO

NIO has struggled with getting its electric vehicles out of its production facilities in China. A key reason for this was lockdowns constricting much of the economic activity in the country. However, there are signs that China is in the process of lifting lockdowns and imposing less restrictive measures, as I have alluded to in a previous article on Alibaba NYSE: BABA. The gist of my thesis applies as much to Alibaba as it does to NIO. In short, COVID lockdowns have wreaked havoc on China's economy, which has contracted its GDP. The costs of keeping its main cities in lockdown may now outweigh the benefit of reducing case numbers, as seen with Shanghai's upcoming reopening on June 1. Furthermore, some have observed that China is taking a softer stance towards the virus in general, terming its pivot "dynamic zero-covid" that will help get its economy back on its feet again. Therefore, NIO's problems with production could ease as China reopens and turns a much-needed corner regarding economic recovery.

The other side is that NIO has a very competitive valuation compared to previous levels. The company's P/S ratio stands at 5.09, while its sales per share are at $3.80. Near the peak of the company's share price of $53.20, the sales per share were lower at $3.11, with a P/S ratio of 17.11. This makes the company's stock undervalued on a relative basis.

The Bear Case for NIO

The other side of the argument for NIO is the legal and geopolitical risks surrounding this stock and the dramatic slowdown in its production of electric vehicles (EVs). The SEC recently made NIO a de-listing contender that has spooked some investors. Also, the company is being investigated for a possible breach of federal security laws. Another factor that is working against the company is the fact that the supply chain is still currently congested, which will be likely to affect the company's top and bottom lines.

NIO Vs. Tesla

Tesla NASDAQ: TSLA has become a key competitor to NIO through NIO’s release of the ES7 sports utility vehicle as competition intensifies. It is, therefore, worth comparing the companies using key investment ratios. In terms of financial performance, NIO returned a -58.24% loss to investors while TSLA gave a positive 25.79% return. On a Price/Sales basis, TSLA is significantly more expensive. TSLA has a P/S ratio of 13.46, while NIO has a P/S ratio of 5.10.

It should be noted that NIO is growing significantly faster than TSLA on a 3-year basis. The company's 3-year CAGR growth rate is 79.49%, while TSLA delivered 40.15% growth. That growth pattern is set to continue in the future for NIO as its FWD revenue growth is 84.90% compared with TSLA's 55.33%. 

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