Electric-vehicle (EV) stocks were some of the biggest winners of 2020. And even if people are starting to question the valuations these companies have achieved from investor exuberance, they keep marching higher. 

Tesla (NASDAQ:TSLA) has garnered much of the publicity, so it might surprise you that shares of Chinese EV maker NIO (NYSE:NIO) have significantly outperformed those of Tesla over the past year. That makes it worthwhile to investigate whether NIO is still a buy for 2021. 

grey NIO ET7 sedan

NIO ET7 luxury sedan. Image source: NIO.

Investor enthusiasm

Tesla's meteoric rise was the subject of many headlines over the last year, and led speculative investors to search for "the next Tesla." One obvious place to look was the largest automotive market in the world. As recently as early 2020, NIO's business flirted with bankruptcy. But a push by the Chinese government to accelerate growth in the country's EV industry contributed to strong sales growth, and investors piled in. 

NIO Chart

NIO data by YCharts

As the stock soared, the company also took advantage to raise needed capital. This diluted existing shareholders, as can be seen from the faster growth of enterprise value compared to the stock price.  

Solid pace of growth

While not growing as quickly as the share price itself, NIO's business is growing at a very strong pace. Vehicle deliveries increased by 113% in 2020 compared to the prior year. 2020 represented almost 60% of the company's overall cumulative vehicle deliveries. 

But at just under 44,000 vehicles, that is still less than 1/10th of Tesla's 2020 volume. NIO is expanding its product offerings with a new luxury sedan announced at the recent "NIO Day" presentation. The ET7, which will be NIO's first sedan, comes with a new, larger 150 kWh battery pack. It will have a maximum range of about 621 miles, according to the company. That's further than Tesla's Model S maximum range of 402 miles, as well as the Lucid Motors Air sedan range of 517 miles. 

Market opportunity

EV sales in China surpassed 1 million in 2020, and the government aims to expand that to 5 million by 2025. That number could reach 10 million by 2030, and approach 20 million by 2040, according to research organization BloombergNEF.

Competition is also growing, however. Tesla delivered its first Model Y mid-size SUV from its Shanghai factory just this month. Other Chinese EV companies are also growing sales at triple-digit rates, so NIO is far from being the leader in the country. Warren Buffett-backed BYD (OTC:BYDDY) sold almost 131,000 battery-electric vehicles (BEVs) in 2020, and more than 460,000 vehicles overall.

There is clearly more room for exponential vehicle sales growth in the coming years, and NIO's ET7 introduction shows the company plans to have a large role. NIO is also innovating with a battery swap program that allows customers to "recharge" via a faster battery exchange. The company says its automated battery swap stations take only three minutes for a fully charged battery replacement.

Will the stock follow? 

As with other names like Tesla, the question investors struggle with is the stock's valuation. NIO's total 2020 revenue through the third quarter was almost $1.5 billion, and full-year 2020 should approach $2.5 billion. 

But the company has yet to make a profit, so looking at a price-to-sales ratio is a better way to evaluate valuation. With a current market capitalization approaching $100 billion, NIO trades at almost 40 times 2020 sales, and what is estimated to be about 20 times 2021 sales. 

By that metric, it's valued higher than Tesla. Considering the competition and uncertainty looking forward, there is more downside risk than upside potential right now in NIO stock.

Investors are betting on the massive market potential for EV growth. If everything goes right for NIO, shares could outperform from here. But if you add it to a portfolio today, you should be prepared for outsized losses, too. That's the definition of a speculative investment. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.