What happened
Shares of Chinese electric-vehicle maker NIO (NIO 8.72%) were trading higher on Friday, after a Wall Street analyst initiated coverage of the company with a bullish note.
As of 11 a.m. EST, NIO's American depositary shares were up about 5.9% from Thursday's closing price.
So what
In a note Friday morning, Nomura analyst Martin Heung initiated coverage of NIO with a rating of buy and a price target of $80.30.
Heung wrote that he likes NIO for its "Tesla-like top-down approach" to product cadence. NIO, like Tesla (TSLA -1.11%), started with a premium product (the ES8 three-row luxury SUV), followed by more "consumer-friendly models" (the five-passenger ES6 and EC6 crossovers). The idea is that the profits from the more expensive models will help fund the development of more affordable models over time.
NIO's current flagship is the big ES8 luxury SUV. Image source: NIO.
Heung also notes that Chinese consumers are willing to pay prices comparable to those of similar European luxury-car models for NIOs, which he feels shows that NIO has successfully established itself as a credible upscale auto brand. The analyst also regards NIO's batteries-as-a-service program as a "revolutionary concept" that lowers up-front costs, creates a revenue stream for NIO over time, and provides a competitive advantage versus traditional recharging.
Now what
Auto investors should note that Heung said that his price target of $80.30 is based on a 25% discount on Tesla's current price-to-sales ratio of 26, not on a bottom-up fundamental analysis of NIO's likely future cash flows. In other words, he believes NIO's stock price will continue to rise because Tesla's has risen.
Your humble Fool, who has been in this game since the original dot-com boom (and subsequent bust), will leave you with this thought: That kind of thinking tends to work until it doesn't. Trade carefully.
