NIO Inc.'s (NIO, Financial) stock has experienced sporadic surges lately, which could have many investors wondering whether a full-on rebound is coming. However, the recent shift in economic and financial conditions needs to be considered, as they could be significant headwinds for the company.
I am bearish on the stock and believe it is overvalued; here's why.
Increase in EV activity isn't sustainable
According to the most recent data, electric vehicle uptake exceeded expectations during 2021 and is still growing in 2022.
Electric vehicles make up 23% of new car registrations in Europe, while 13% of global new car registrations are EVs.
Although sales have surged, electrification will likely stall in the short term due to a shortage of semiconductor chips, which has brought the time-to-chip delivery ratio to 26.6 days. EVs require roughly 2,000 chips for a vehicle to be manufactured, nearly twice that of an internal combustion vehicle. This is a significant challenge as pandemic lockdowns and resilient commodity prices pose a threat.
Furthermore, consumer spending power could stall due to surging inflation, which could cause a shift in the consumer utility cycle and, in turn, decrease demand for EVs.
Wall Street analyst's upgrade
Bank of America analyst Ming Hsun recently upgraded NIO stock to a buy, given the company's prospects of rising sales and margins during the second half of 2022.
However, I would have to dispute the argument. Even if NIO does manage to improve its income statement, I do not see it gaining support from the stock market. My counterargument is based on the fact the stock is 47% owned by retail investors, who are in a period of risk-aversion, which could see growth stocks such as NIO stall for the foreseeable future.
Growth stocks can be objectively valued by considering the price-sales ratio as it is a less cyclical metric than lower-income statement metrics. Additionally, a company's intellectual property could provide a subjective valuation; thus, looking at company-specific value is not helpful.
NIO's current price-sales ratio suggests the stock is trading at 4.1 times its sales, which would have been considered respectable if the stock market was in a growth cycle. However, given that we are in a contractionary economic sphere, I would say the stock is overvalued.
The bottom line
NIO is not in great shape at the moment. Certain Wall Street analysts are bullish on the stock, but their claims are not substantiated as significant supply chain issues in China persist along with a stagnating consumer base.