Is NIO Stock still a buy in 2021?

Electric vehicle (EV) stocks were among the biggest gainers of 2020. And even though people are starting to question the valuations these companies have achieved through exuberance from investors, they continue to move up.

You’re here (NASDAQ: TSLA) has garnered a lot of publicity, so it might surprise you that the shares of the Chinese electric vehicle maker NIO (NYSE: NIO) have vastly surpassed those of Tesla over the past year. It’s worth considering whether NIO is still a buy for 2021.

NIO ET7 luxury sedan. Image source: NIO.

Investor enthusiasm

Tesla’s meteoric rise made headlines last year and led speculative investors to seek out “the next Tesla”. The world’s largest auto market was an obvious place to look. As recently as 2020, NIO’s company flirted with bankruptcy. But a push by the Chinese government to accelerate the growth of the country’s electric vehicle industry has contributed to strong sales growth and investors have piled up.

NIO data by YCharts

As the stock skyrocketed, the company also took the opportunity to raise the necessary capital. This dilutes existing shareholders, as evidenced by the faster growth in enterprise value relative to the share price.

A solid growth rate

Without growing as fast as the share price itself, NIO’s business is growing at a very strong pace. Vehicle deliveries increased 113% in 2020 compared to the previous year. 2020 represented nearly 60% of the company’s cumulative vehicle deliveries.

But at just under 44,000 vehicles, that’s still less than 1/10 of Tesla’s 2020 volume. NIO is expanding its product offering with a new luxury sedan announced at the recent “NIO Day” presentation. The ET7, which will be NIO’s first sedan, comes with a new, larger 150 kWh battery. It will have a maximum range of around 621 miles, according to the company. That’s more than the Tesla Model S’s maximum range of 402 miles, as well as the Lucid engines The range of the aerial sedan is 517 miles.

Market opportunity

Sales of electric vehicles in China topped one million in 2020, and the government aims to increase that figure to 5 million by 2025. That number could reach 10 million by 2030 and approach 20 million by 2040, according to research organization BloombergNEF.

However, competition is also increasing. Tesla delivered its first Model Y midsize SUV from its factory in Shanghai this month. Other Chinese EV companies are also increasing their sales at triple-digit rates, so NIO is far from the leader in the country. Supported by Warren Buffett WORLD (OTC: YES) sold nearly 131,000 battery electric vehicles (BEVs) in 2020 and more than 460,000 vehicles in total.

There is clearly more room for exponential growth in vehicle sales in the years to come, and the introduction of the ET7 by NIO shows the company plans to play an important role. NIO is also innovating with a battery swap program that allows customers to “recharge” through a faster battery swap. The company says its automated battery swap stations only take three minutes for a fully charged battery replacement.

Will the stock follow?

As with other names like Tesla, the question investors grapple with is the stock’s valuation. NIO’s total revenue in 2020 in the third quarter was nearly $ 1.5 billion, and the year 2020 is expected to approach $ 2.5 billion.

But the company hasn’t made a profit yet, so looking at a price / sales ratio is a better way to gauge valuation. With a current market cap of around $ 100 billion, NIO is trading at nearly 40 times sales in 2020, and what is estimated to be around 20 times sales in 2021.

According to this metric, its value is greater than Tesla. Given the competition and uncertainty about the future, there is currently more downside risk than upside potential for NIO stocks.

Investors are betting on the huge potential of the market for EV growth. If all goes well for NIO, stocks could top from here. But if you add it to a portfolio today, you should also be prepared for outsized losses. This is the definition of a speculative investment.