Does EV Stock NIO Look Overvalued Ahead of Its Q3 Earnings?

This year, EV (electric vehicle) stocks have been on fire. Chinese EV maker NIO has scheduled its Q3 earnings for Tuesday, Nov. 17. While EV stocks such as NIO and Tesla have grown multifold, many market observers have raised concerns over their valuation. Is NIO stock overvalued ahead of its Q3 earnings release?

Analysts expect NIO to post revenue of $616.3 million in the third quarter, marking a year-over-year rise of 134 percent. However, they also forecast it to post an adjusted loss per share of $0.13 in the quarter. In the second quarter, NIO's gross margin was positive for the first time, and the company appeared confident about reaching double-digit gross profit by the end of the year.

Unfortunately, we don't know NIO’s PE multiple because the company isn't posting net profits. It isn't expected to see profit in 2021 or 2022, either. Likewise, Tesla was profitable in only a handful of quarters before the third quarter of 2019.

In Q3 2019, Tesla posted a net profit and talked about achieving sustainable profits going forward. The Elon Musk-led company has posted a net profit in every quarter since. Tesla stock is valued at a next-12-month PE multiple of 113x.

Most EV plays, barring Tesla, are currently posting losses. Markets are valuing them based on future profitability and high growth, and EV stocks' valuation look stretched if you look at the companies like automakers rather than tech players. For instance, NIO’s market capitalization is now higher than General Motors', and Tesla's market capitalization is larger than that of Volkswagen, Toyota, General Motors, and Ford combined.

This year, Tesla expects to deliver around half a million cars—in comparison, Toyota delivered over 10 million cars last year. Tesla makes less than 1 percent of total global vehicle sales, and NIO's sales were even lower than Tesla's.

It's difficult to justify NIO’s current valuation. However, EV stocks have seen a rerating this year, and Tesla has been a valuation benchmark. Tesla's next-12-month enterprise value-to-sales multiple is 9.5x, while NIO's is roughly double that, at 19.7x.

In comparing Tesla's and NIO's valuation, we need to consider two things. First, given its small base, NIO is growing much faster than Tesla, which has reached critical mass. Second, the two companies have somewhat different business models. While Tesla has an integrated business model and produces many of its car parts, NIO’s cars are made by JAC Motors. NIO might not become profitable anytime soon, whereas Tesla is now a sustainably profitable venture.

All said, NIO stock has started to look overvalued. If the company doesn't come up with good numbers in its Q3 earnings call, bears may prevail. During the Q3 earnings season, a lot of high-flying growth stocks were punished after the companies' earnings and outlook failed to impress. Will it be the same for NIO stock? We’ll know next Tuesday.