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Why Shares of Electric Carmaker NIO Rocketed Up 54.7% in July

By John Bromels - Aug 11, 2020 at 6:00AM

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Investors think it could be the next Tesla.

What happened

Shares of Chinese battery-electric carmaker NIO (NIO 3.84%) soared in July, according to data provided by S&P Global Market Intelligence. The stock was on fire for the first nine days of the month, blasting up more than 90%, before easing off during the following week.

Year to date, shares have risen more than 250%, easily trouncing the S&P 500, which is only up about 4% so far in 2020.

A rocket blasts above a layer of clouds.

Image source: Getty Images.

So what

NIO started the month off right, announcing that its sales in both June and its second quarter had surpassed expectations. The company, which makes luxury SUVs for the Chinese auto market, sold 3,740 vehicles in June and 10,331 in the second quarter, up 179% and 191%, respectively, year over year.

The awesome sales numbers followed on the heels of reports that Chinese behemoth Tencent Holdings had upped its stake in the fledgling automaker. Together with an infusion of cash from a Chinese economic development fund, the move eased market concerns about the company's liquidity.

However, after a week of upward movement, shares pulled back, helped along by a Goldman Sachs analyst's sell rating on the stock. Analyst Fei Fang isn't bearish on the company, but felt like the stock's valuation had risen too far, too fast.

The rest of the month was relatively quiet. Well, as quiet as things get in the white-knuckle world of electric-vehicle stocks.

Now what

At above $14 per share, NIO's stock is expensive, even in the world of richly valued electric-vehicle stocks. Even Tesla's red-hot stock only has a price-to-sales ratio of 10.6, while NIO's is 13.7.

Despite its lofty valuation, the automaker has a tremendous opportunity in China to position itself as the home-grown rival to U.S. import Tesla; as a result, its share price is likely to go up, whether the fundamentals support such a move or not. However, until NIO can show it isn't a one-trick pony by expanding its vehicle lineup and growing its sales, it's still a very speculative investment.

John Bromels owns shares of Tesla. The Motley Fool owns shares of and recommends Tencent Holdings and Tesla. The Motley Fool has a disclosure policy.

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