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Investors still aren’t entirely convinced by NIO Inc.’s (NYSE:NIO) earnings despite a 26% price rise

NIO Inc. (NYSE:NIO) shares had a truly impressive month, gaining 26% after a rough patch previously. The bad news is that even after the stock’s rally over the past 30 days, shareholders are still down about 7.3% over the last year.

Even after such a big price rally, NIO’s price-to-sales (or “P/S”) ratio of 2.2x could still make it seem like a strong buy right now compared to the overall US auto industry, where about half of companies have P/S ratios above 4.4x and even P/S above 10x are quite common. However, we would need to dig a little deeper to determine whether there is a rational basis for the sharp reduction in P/S.

See our latest analysis for NIO

NYSE:NIO Price-to-Sales Ratio vs. Industry December 27, 2023

What has NIO’s recent performance looked like?

With revenue growth lower than most other companies lately, NIO has been relatively slow. The P/S ratio is likely low because investors believe this poor earnings performance is not going to improve. If you still like the company, you hope earnings don’t deteriorate and you can buy shares while they’re out of fashion.

Want to get a complete picture of analyst estimates for the company? Then our free The NIO report will help you find out what’s on the horizon.

Is there revenue growth expected for NIO?

There is an inherent assumption that a company would have to significantly underperform the industry for P/S ratios like NIO’s to be considered reasonable.

Looking back, we see that the company grew its revenue by 27% last year. The last three-year period also saw an incredible overall increase in revenue, helped by its incredible short-term performance. As a result, shareholders would have been over the moon with these medium-term revenue growth rates.

As for the outlook, the next three years are expected to generate growth of 37% per year according to estimates from analysts who monitor the company. At the same time, the rest of the sector is only expected to grow by 33% per year, which is significantly less attractive.

With this information, we find it odd that NIO is trading at a lower P/S than the industry. Apparently, some shareholders doubt the forecasts and accept significantly lower sales prices.

The key to remember

NIO shares have risen noticeably, but its P/S is still moderate. Using only the price-to-sales ratio to determine whether you should sell your stock is not wise, but it can be a useful guide to the company’s future prospects.

To us, it appears that NIO is currently trading on a significantly depressed P/S given that its forecasted revenue growth is higher than the rest of its industry. Certain major risk factors could put downward pressure on the P/S ratio. It appears that the market might be expecting earnings volatility, as these conditions would normally boost the stock price.

And what about other risks? Every business has them, and we spotted them 2 warning signs for NIO you should know that.

If Companies With Strong Past Earnings Growth Are Right For Youyou might like to see this free set of other companies with strong earnings growth and low P/E ratios.

The assessment is complex, but we help to simplify it.

Find out if NIO is potentially overvalued or undervalued by checking out our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to constitute financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or your financial situation. Our goal is to provide you with targeted, long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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