Is the NIO share price a bargain below $40?

Since the middle of August, the NIO (NYSE: NIO) share price has been trading below $40. While this is more than four times above the stock’s IPO price, it’s more than a third off its all-time high of $62. 

However, as the stock’s declined in value, its fundamentals have continued to improve. Therefore, I’m starting to wonder if the NIO share price is now a bargain at current levels. 

Growth potential

In the past, whenever I’ve compared the Chinese company to its US peer, Tesla, I’ve consistently concluded I’d rather own the latter, due to its existing position in the market and growth potential. 

Nevertheless, NIO is starting to catch up on its larger peer. Not only is the group ramping up its production, but it’s also sealing agreements with international auto producers to expand its global manufacturing footprint. 

Last week, the Chinese company announced it had formed a new partnership with sports car manufacturer Lotus. Owned by Chinese manufacturer Geely, Lotus is on track to launch its own electric vehicles later this year. 

Under the terms of the partnership, NIO will take a stake in Lotus. This could result in a collaboration between the partners. 

NIO’s main advantage over Tesla is its replaceable battery pack technology. Rather than waiting for batteries to charge, consumers can switch out dead batteries for fully-charged ones at dedicated service locations, allowing them to immediately continue on their journey.

If this technology were available in an internationally-recognised sports car manufacturer such as Lotus, I think there will be strong demand for the product.

NIO share price valuation

It could be some time before this agreement yields financial results. In the meantime, I can only value the company based on its current sales. 

Judging by its own sales projections, the NIO share price is dealing at a price-to-sales (P/S) ratio of around 15. That compares to 17 for Tesla.

Based on this simple analysis, it does appear as if the stock is undervalued at current levels. I wouldn’t say it’s a bargain, but it certainly looks cheap compared to Tesla. 

That said, this is only a back-of-the-envelope style calculation. There’s no guarantee the company will hit its output projections for the year. There’s also no guarantee it will ever turn a profit.

So if profits remain elusive, shareholders may have to stump up extra cash to keep the lights on. The prospect of another cash call is probably the most considerable risk hanging over the company at present.  

Therefore, despite its attractive qualities and low valuation compared to its US peer, I’m going to avoid the NIO share price. I think the company’s outlook is just too unpredictable. And that’s without taking into account the uncertain regulatory environment in China.