NIO (NYSE: NIO) stock and Tesla (NASDAQ: TSLA) stock have had very different experiences in 2021. Indeed, while the Tesla share price soared over 50%, NIO’s dipped around 40%. As such, can Tesla continue its excellent performance this year, or is it better to buy NIO on the dip?
Why has NIO dropped so much?
The main cause of NIO’s fall is general investor worries around Chinese stocks. In fact, due to the tensions currently going on between US and China, there’s a real risk that some Chinese stocks will have to delist from the US. This is so that American regulators can no longer access the internal documents of these companies. This has already led to the delisting of Didi from the US, just a few months after its IPO. As such, there is a real risk that NIO would also have to delist, and this could cut off a vital source of funding for the company that would potentially drive NIO’s price lower. It is a key risk to consider.
Nonetheless, NIO is still performing excellently. For example, in the third quarter, its revenue rose 116% to over $1.5bn. Although revenue growth is expected to slow to around 50% in the fourth quarter, this would still be excellent growth and a reason for me to buy the shares.
I’m also optimistic that growth will be strong for the foreseeable future. Indeed, JP Morgan analyst, Nick Lai, expects that NIO will control around 20% of the Chinese vehicle market in 2025. This should be driven by the fact that the Chinese government is attempting to boost the growth of electric vehicles (EVs), through considerable tax exemptions. This gives me optimism that NIO can continue its incredible growth. With a forward price-to-sales ratio of under 10, I may, therefore, buy some NIO stock.
What about Tesla stock?
Without worries about China, Tesla stock has been able to soar, reaching a $1bn valuation. This is mainly due to the company’s strong growth. In fact, in the Q3 trading update, revenues rose 57% year-on-year to around $14bn. Yesterday, the Tesla share price also soared over 10%, as it reported a record 308,600 deliveries in the fourth quarter. Unlike NIO, which saw a Q3 loss of $442m, Tesla has also reached profitability. This is an excellent sign for any company, and as the shift towards greener energy accelerates, I feel that profits will continue to soar.
But after its rise, Tesla stock does seem expensive. For example, it trades on a price-to-sales ratio of around 20, over twice as much as NIO. The large amount of competition in the EV sector, which is increasingly including traditional automotive companies like Toyota and Volkswagen, may also see Tesla’s market share decrease over the next few years. I feel this is making it increasingly difficult to justify Tesla’s $1bn valuation.
As such, I’m far more tempted by NIO than Tesla, as I feel that its valuation is far more reasonable. I’ll be leaving Tesla on the sidelines for now.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
