What is EV sector mania doing to Tesla and Nio's share prices?

It’s fair to say that electric vehicle (EV) mania has been a significant factor in boosting Nio [NIO] and Tesla’s [TSLA] share prices, both of which have reached new peaks over the last month.

Tesla’s share price recently made headlines as it pushed past the $2,000 mark in August.

On 11 August, Tesla’s share price benefitted from the announcement that it would split its stocks five-for-one in the form of a stock dividend in order “to make stock ownership more accessible to employees and investors”.

The shares were distributed on 28 August and trading began on a stock split-adjusted basis on 31 August, pushing Tesla’s share price up 12.6% to $498.32 (at its adjusted value) — a huge 495.6% year-to-date increase.

The next day, Tesla’s share price soared even higher, reaching an intraday peak of $502.49, before closing at $475.05.

However, since then Tesla has suffered a shocking setback. On Tuesday 8 September, following the Labor Day weekend, Tesla’s share price plummeted 21% to close at $330.21 — the worse decline on record, according to the Financial Times. Possible reasons for this mammoth drop include Tesla’s failure to make it onto the S&P 500, as well as the high number of short-term retail traders who own shares in the EV firm.

Nio’s share price has also set a new record recently, reaching an intraday high of $20.97 on 26 August, before closing at $20.44 — a growth of 408.46% year-to-date.

Nio’s share price surge, not to mention its relative stability compared to Tesla’s share price, will have delighted investors.

After closing at $18.09 on 9 September, Nio’s share price has gained 350% so far this year.

What’s new in the EV market?

On top of Tesla and Nio’s recent gains, investors were excited to see Xpeng’s [XPEV] debut on the Nasdaq on 27 August with an initial offer of $15. On its first day, the stock grew by 41.5% when it closed at $21.22 — raising $1.5bn in the process.

With all this hype, it’s worth looking at how the EV sector compares to traditional car companies.

All the pure-play EV companies tracked by Barron’s (including Tesla, Nio and Xpeng) are worth a total of $492bn. On the other hand, the publication noted stocks for traditional car manufacturers (including Ford, Fiat Chrysler and Volkswagen) amount to $589bn.

Despite their valuation, the EV sector is far behind the traditional auto industry in terms of deliveries, Allen Root wrote in Barron’s.

“The delivery gap might cause investors to question how EV makers could be worth almost as much as the traditional industry,” Root considered.

“EV sales, however, are growing faster than traditional sales. And there are other fundamental reasons EV stocks are hot, including environmental concerns and falling battery costs,” he added.

“EV sales, however, are growing faster than traditional sales. And there are other fundamental reasons EV stocks are hot, including environmental concerns and falling battery costs” - Allen Root

Looking at the road ahead

The recent surge in Nio’s share price was partly boosted by the news that Paul Gong, analyst with UBS, upgraded the stock from Sell to Neutral on 25 August. He raised his price target from $1 to $16.30.

“Our previous urgent concerns around balance sheet have been assuaged by successful capital raising in June, with strong global market appetite for the EV story and a recovery in China meaning limited dilution,” Gong said.

“Our previous urgent concerns around balance sheet have been assuaged by successful capital raising in June, with strong global market appetite for the EV story and a recovery in China meaning limited dilution” - Paul Gong, analyst with UBS

Tesla and Nio have been given Hold and Buy ratings respectively by Zacks and by CNN Money.

For Tesla, this rating is held by a majority of 18 out of 37 analysts, whereas five out of 15 analysts have given Nio this rating. For Nio, a majority of seven analysts rate the stock a Buy.

According to CNN Money, the consensus price targets are also close for both companies, with 32 analysts giving Tesla’s share price a median target of $297.50 and 15 analysts giving Nio a median target of $120.46. These targets would represent a decline of 18.8% for Tesla, and an impressive 565.9% rise for Nio’s share price, as of 9 September’s closing prices.

Analysts led by Daniel Ives of Wedbush Securities say pent-up demand in the Chinese EV market for Model 3s and recent price cuts are creating a “perfect storm of demand” for Tesla, according to MarketWatch,

“We believe that the China growth story is worth at least $400 per share in a bull case to Tesla as this EV penetration is set to ramp significantly over the next 12 to 18 months, along with major battery innovations,” they said.