Is Nio’s share price in a bubble?

Widely considered to be Tesla’s [TSLA] Chinese counterpart, Nio [NIO] has recently seen its share price rally, alongside optimism surrounding the elective vehicle [EV] market.

On 10 July, Nio’s share price hit an all-time high, closing at $14.98. It had grown 272.6% for the year-to-date. 

The same day, Tesla’s share price hit an all-time high itself, closing at $1,544.65 (up 269.24% in the year-to-date). Meanwhile, other Nio peers like Nikola [NKLA] and Workhorse [WKHS] had both seen their prices dip from recent values. 

As Nio’s share price and that of its competitors currently displays collective average growth of around 300% (through 17 July) – Nio’s share price is up 232.8% to 22 July’s close -, some believe EV stocks could be in a bubble. 

What has driven Nio’s share price surge, and what's the outlook for the broader market?

 

 

What’s been driving Nio?

At the beginning of 2020, Nio’s future looked bleak. The coronavirus outbreak had led the company to face major cash issues, putting it at the brink of bankruptcy. 

In February alone, Chinese EV sales dropped 77% YoY (to just 11,000 units), according to the China Passenger Car Association.

   

Nio managed to recover from the shortfall, delivering 10,331 vehicles in Q2, exceeding its guidance and clocking impressive growth of 191% year-on-year. This strength continued with the company delivering 3,740 vehicles in June, setting a new monthly record in the process. 

It is, however, important to note that while Nio sold nearly 32,000 cars in 2019, it also lost $4.2bn. This represents a loss equivalent to $131,000 per vehicle. 

As a result, the company sought help in the form of a $1bn cash injection led by Chinese state-owned enterprises in April, in a bid to mitigate the risk of insolvency. It’s also been propped up by strategic investors, including Chinese conglomerate Tencent Holdings [TCEHY], which now owns a 15.1% stake in Nio.

  

Do analysts dream of electric vehicles?

There are indicators that the EV market’s future is bright — in terms of its commercial viability (electric vehicles are becoming increasingly affordable and charging infrastructure more widespread), stricter emission rules and favourable government regulations — but analysts are still questioning the valuation of skyrocketing EV share prices. 

Of all the EV stocks, Tesla’s holds by far the highest value, and its market cap has now surpassed Toyota’s [TM]. However, the company has yet to report a full-year profit. It sold its one-millionth car in March, but that’s only 10% of what Toyota sells annually. 

“EV markets look promising, especially amid better-than-expected second-quarter vehicle deliveries from Tesla and NIO versus weak year-over-year sales of traditional automakers. However, the pace of electrification is debatable, considering supply chain disruptions caused by the coronavirus. Also, Tesla, NIO, Nikola and Workhorse are yet to prove if they can generate sustainable profits,” Rimmi Singhi wrote in Zacks.

“When a stock rises this much, I mean 43% in five or six days, that only happens after a stock crashed,” Matt Maley, chief markets strategist at Miller Tabak, told Yahoo Finance. This has happened with Tesla, he said. 

“The stock more than doubled when the big rally came along. Maybe a company can go up 43% if they come up with a COVID-19 vaccine. But stocks like this after they have rallied a lot that’s a bubble. And to me, that tells me people should take at least some profits off the table and be careful about buying the stock at these prices.”

“The stock more than doubled when the big rally came along. Maybe a company can go up 43% if they come up with a COVID-19 vaccine. But stocks like this after they have rallied a lot that’s a bubble. And to me, that tells me people should take at least some profits off the table and be careful about buying the stock at these prices” - Matt Maley, chief markets strategist at Miller Tabak

 

A cautious recommendation on Nio

At present, Zacks has a consensus hold rating on Nio’s share price, while the consensus among 13 analysts polled by CNN Money is also to hold. This comes from a majority of eight, with two giving the share price a buy rating and three suggesting to sell. 

Among 12 analysts offering 12-month share price forecasts, CNN Money reports a median target of $40.88. This would represent a 218.9% increase from 20 July’s closing price of $12.82.

“While there is a lot of hot air pumping up in the EV industry currently, the stocks do appear over-inflated and the bubble might just be waiting to burst” - Rimmi Singhi

 

“While there is a lot of hot air pumping up in the EV industry currently, the stocks do appear over-inflated and the bubble might just be waiting to burst,” Singhi stated. “So, it’s better to wait until the excitement subsides and grab the stocks at a better entry point.”