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Governmental policy support and consequent investor optimism have propelled many electric vehicles (EV) stocks to fresh highs over the past year, making them some of the most talked about stocks in the Reddit WallStreetBets (WSB) chatroom. However, the global shortage of semiconductor chips and other raw materials makes the near-term prospects bleak for Reddit EV favorites Tesla (TSLA) and NIO (NIO). In fact, despite retreating from their highs, these two stocks still look highly overvalued. So, we think they are best avoided now.
On the one, hand investor optimism over the long-term prospects of the electric vehicle (EV) industry, due, among other factors, to increasing governmental initiatives worldwide to shift to zero-emission transportation systems helped most of the EV stocks rally over the past year. But on the other hand, given the industry’s solid growth potential, many production companies have shifted their focus to building EVs and efficient auto parts, causing the industry to become significantly overcrowded.
Owing to the impressive stock market performance of many EV stocks over the past year irrespective of fundamental strength, the industry has caught the eye of Reddit chatroom WallStreetBets (WSB). The Reddit forum has been trying to precipitate another Gamestop (GME)-like short squeeze. The relative overvaluation of the industry has led to potential asset bubble concerns because most companies are currently trading significantly higher than their revenue and earnings potential would imply.
Tesla, Inc. (TSLA) and NIO, Inc. (NIO), two popular EV players, are found frequently in the Reddit forum’s top 10 dashboard. These stocks are now losing momentum after an impressive rally over the past year. Their overvaluation and the dour expectations of Wall Street analysts about their growth prospects make them best avoided now.
Tesla, Inc. (TSLA)
Headquartered in Palo Alto, California, this EV industry giant designs, manufactures, and sells EVs and EV powertrain components. The company operates through two segments—Automotive, and Energy Generation and Storage. The Automotive segment includes the design, development, manufacture and sale of electric vehicles. TSLA develops energy storage products for use in homes, commercial facilities and utility sites.
In March, officials in China banned TSLA vehicles from military bases and housing compounds amid concerns that potentially sensitive data from its onboard cameras could be collected and stored on its servers. Today, Reuters reported that TSLA is boosting its engagement with mainland regulators and beefing up its government relations team in wake of China’s scrutiny. Also in March, EVmo, Inc, a leading provider of vehicles to the rideshare and delivery gig economy, took delivery of its first fleet of TSLA vehicles through its Fleet Partnership Agreement. Through this partnership, EVmo hopes to convert its entire fleet to EV’s by the end of this year and lead in the budding North American rideshare industry.
TSLA’s total revenue has declined 3.3% sequentially to $10.39 billion for its fiscal year 2021 first quarter, ended March 31. Its operating expenses have increased 70.4% year-over-year to $1.62 billion. Its total liabilities have increased 42.2% year-over-year to $52.97 billion, as of March 31, 2021. The company had cash and cash equivalents of $17.72 billion at the end of the period, representing a 12.3% decline from the beginning.
TSLA has gained marginally year-to-date and lost 10.6% over the past month. It ended Friday’s trading session at $709.44, 21.2% below its 52-week high. In terms of forward non-GAAP P/E, TSLA is currently trading at 160.30x, which is 760.9% higher than the 18.62x industry average. And in terms of its forward Price/Sales, the stock is currently trading at 13.85x, 903.3% higher than the 1.38x industry average.
TSLA’s poor prospects are also apparent in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
The stock has an F grade for Value, and a D grade for Stability. In addition to the POWR Ratings grades we’ve just highlighted, one can see TSLA’s ratings for Growth, Sentiment, Momentum, and Quality here.
The stock is ranked #38 of 53 stocks in the B-rated Auto & Vehicle Manufacturers industry.
NIO, Inc. (NIO)
Known as the ‘Tesla of China,’ NIO designs, manufactures and sells smart and connected EVs integrated with next generation technologies and artificial intelligence. The company’s products include its EP9 supercar and ES8 7-seater SUV. The company provides users with home charging, power express valet service, and other power solutions that include access to public charging, access to power mobile charging trucks, and battery swapping.
In April, Ford Motor Company (F) partnered up with NIO to access its charging network for Ford’s made-in-China Mustang Mach-E in 20 major cities across China.
In March, NIO halted vehicle production in its JAC-NIO manufacturing plant in Hefei, China for five days, due to a semiconductor shortage. In January, NIO closed an offering of $750 million of convertible senior notes due 2026 and 2027. NIO is expected to use the proceeds of the offerings for general corporate purposes and to strengthen its cash and balance sheet positions.
NIO’s non-GAAP loss from operations was RMB199.44 million for the fiscal year 2021 first quarter ended March 31, versus RMB1.54 billion in the first quarter of 2020. NIO’s RMB354.48 million non-GAAP net loss reported in the fourth quarter compared to a RMB1.66 billion loss in the prior-year period. Also, its loss per share was RMB0.23, compared to that of RMB1.60 in the year-ago period. However, its total liabilities have increased 34.7% year-over-year to RMB30.68 billion as of March 31, 2021.
Analysts expect NIO’s EPS to remain negative in its fiscal year 2021. NIO has gained 18.3% year-to-date but lost 30.1% over the past three months. It ended Friday’s trading session at $39.84, 40.5% below its 52-week high. In terms of forward EV/Sales, NIO is currently trading at 11.23x, which is 554.7% higher than the 1.71x industry average. And in terms of its forward Price/Sales, the stock is currently trading at 12.02x, 770.9% higher than the 1.38x industry average.
NIO’s POWR Ratings are consistent with this bleak outlook. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.
The stock has an F grade for Stability and Sentiment, and a D grade for Value and Quality. We have also graded NIO for Growth and Momentum. Click here to access all of NIO’s ratings.
NIO is ranked #75 of 79 stocks in the D-rated China group.
TSLA shares fell $2.35 (-0.34%) in after-hours trading Monday. Year-to-date, TSLA has declined -2.94%, versus a 12.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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