NIO (NIO) is a Chinese EV stock that has gained 994% YTD. Many consider the stock to be the “Tesla” of China. 

There are certainly some similarities such as both companies were founded and led by charismatic CEOs, both have loyal customers, their stocks have rich valuations, and both have in a rapidly expanding market.

Additionally, both companies’ first vehicles were high-end sports cars with impressive designs and performance. Now, both are introducing cars at lower price points that will appeal to a wider set of potential buyers.

Valuation Concerns

NIO’s Tesla-like strategy has worked so far as it’s among the best-performing stocks in the entire market. Due to this performance, NIO has achieved a valuation of $63 billion, which is more than legacy automakers like Ford (F) or General Motors (GM). 

This rankles many value investors since NIO is expected to produce just 100,000 cars this year, while Ford and GM will produce 2.4 million and 2.8 million, respectively.

However, the market is forward-looking, and it’s anticipating that NIO will be able to carve out a meaningful amount of market share in the massive EV market. Many believe that EVs will outsell gas-powered cars in China by 2040. This would equate to 4 million vehicles. 

Of course, legacy automakers and other startups will compete for this opportunity as well. However, NIO is currently the clear leader, and buying the stock is an implicit bet that it will maintain this position. 

NIO’s Bull Market

This is the narrative driving the extraordinary gains in NIO’s stock price. And, it’s infected a variety of stocks and sectors that are connected to EVs. Many believe that EVs are in a bubble. If this bubble were to deflate, then it’s likely that all the stocks in the sector would be negatively affected.

There are certainly some indications of froth such as the massive amount of SPACs hitting the market in recent months, rich valuations for companies with no revenue, and the exponential gains in many issues. However, such corrections could be ultimately healthy for the high-quality stocks in the sector as long-term price performance will be determined by the company’s ability to grow sales and produce cars that are popular among the public.

Although it’s a young company, NIO has proved itself adept at both tasks. It’s growing revenues at a 145% clip year over year despite some production issues due to the pandemic. It’s also shown success in growing its production while maintaining quality, which is a challenging and costly endeavor. 

Further, as its production increases, costs will decline further, so margins will increase. Many expect that long-term margins on EVs will continually increase as battery costs are expected to decline, and electric powertrains are cheaper than conventional engines.

Still a Buy?

The POWR Ratings rate NIO a Buy. It has a “B” for Trade Grade, Peer Grade, and Industry Rank. Among Chinese stocks, it’s ranked #14 out of 115.

NIO has a similar profile to many promising growth stocks in the market. The company has tantalizing upside in the long-term, however, it may already be priced into the stock its stock has already experienced an incredible rally of 1,000% in 2020.

Though I believe that this stock is a Buy for the long-term investor, I recommend being cautious in the near-term. Therefore a dollar cost averaging strategy could be a good approach for those that want to own shares of this impressive electric vehicle manufacturer.

Want More Great Investing Ideas?

NIO shares fell $1.59 (-3.61%) in premarket trading Thursday. Year-to-date, NIO has gained 963.68%, versus a 15.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

More Resources for the Stocks in this Article