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The electric vehicle (EV) industry has become one of the hottest, with staggering growth potential this year after an impressive run last year. While increasing awareness of climate change and governmental pledges concerning global warming and a sustainable energy future have been a key factor driving the EV boom, it should be kept in mind that the automotive industry is still struggling with pandemic disruptions.

Governments worldwide are now focused on providing direct relief to citizens through stimulus checks to boost economic activity rather than focusing on infrastructure redevelopment. Though the unemployment rate in the U.S. declined slightly last week, hiring is still weak, implying a prolonged period of weak consumer spending. While economies are struggling to recover, the EV industry is gaining momentum based on speculation, leading to the formation of a potential asset bubble.

Companies such as NIO Limited (NIO) and Workhorse Group Inc. (WKHS) have quadrupled in value over the past year, but have failed to deliver requisite earnings growth. Given the rising volatility in the broader markets, we think these companies are likely to plummet soon.

NIO Limited (NIO)

This Chinese EV manufacturer has attracted significant investor attention due to its reputation as the “Tesla of China.” As the pioneer of the Battery-as-a-Service’ business model, NIO has hit record highs in terms of revenues, demonstrating its cost-efficient production methods and unrestricted access to lithium - a key raw material required in EVs.

Surging investor optimism has driven to a 1177.2% gain over the past year and the stock has gained 1624.6% over the past nine months. While the company maintains impressive sales margins, it has yet to turn a profit.

NIO delivered 7,225 vehicles in January, up 352.1% year-over-year. Its revenues have increased 146.4% from the year-ago value to $666.60 million in the third quarter ended Sept. 30, 2020. However, NIO reported a loss from operations of $139.30 million, and a $154.20 million net loss over this period. Its net loss per American depository share was $0.14.

While NIO generated $70.36 million of gross profit over trailing 12-months, the company reported a net loss of $1.03 billion over this period. Its EBITDA margin and EPS are also negative, despite reporting $1.84 billion in revenues over the past year.

The company’s fundamental weakness, however, has been overlooked by the markets, as reflected by its price gains over the past couple of months, leading to a potential overvaluation of the stock. In terms of trailing 12-month price/sales, NIO has recently been trading at 33.99x, 2421.4% more expensive than the industry average of 1.35x.

A consensus revenue estimate of $4.96 billion for fiscal 2021 represents a 99.8% rise year-over-year. However, analysts expect NIO’s EPS to remain negative this year.

NIO’s POWR Ratings reflect this bleak outlook. It has an overall grade of D, which equates to Sell in our proprietary rating system. In total, we rate NIO on eight different levels, considering 118 different factors, with each factor weighted to an optimal degree.

NIO has a grade of F for Stability, and D for Value and Quality. In the 87-stock China industry, it is currently ranked #84. In addition to the ratings I have discussed here, you can check out additional NIO ratings for Growth, Sentiment, and Momentum here.

Workhorse Group Inc. (WKHS)

WKHS produces high performance electric vehicles for commercial and utility transportation across the United States. It also designs unmanned aerial vehicles purpose built for interstate package delivery. The company is an original equipment manufacturer of commercial medium duty truck series. WKHS has gained 1246.6% over the past year and 93% over the past month.

Although WKHS has received multiple purchase orders from different businesses over the last year, the company is yet to deliver its vehicles in the market. Moreover, the company has lowered its production guidance by 300- 400 vehicles for the fourth quarter ended Dec. 31, 2020, citing COVID-19-related supply chain disruptions.

According to observers, WKHS CEO Duane Hughes sold 25,000 stocks of the company on Feb. 1. This comes in the wake of his sale of 300,000 WKHS shares in January. Several directors and controllers of the company have also sold a portion of their stakes. Naturally, board members selling stocks sends a negative signal to the market about the company.

In October, WKHS submitted a “Type Certification” application with the Federal Aviation Administration for its Horsefly Unmanned Aerial System (UAS). It is still awaiting formal approval from the regulator.

WKHS’ cost of goods sold and selling, as well as general and administrative (SG&A) expenses, increased substantially in the third quarter ended Sept. 30, 2020. Its net loss has increased 631.3% from the year-ago value to $84.10 million.

Analysts expect WKHS’ EPS to decline 350% in the current quarter ending Mar. 31, 2021. The company missed the Street’s EPS estimates in three of the trailing four quarters, which is alarming. While analysts expect the company’s revenue to rise this year, its EPS is expected to remain negative over this period.

WKHS has an overall rating of F, equating to Strong Sell in our POWR Ratings system. It has a grade of F for Value, Stability, Sentiment, and Quality. It is currently ranked #49 out of 50 stocks in the Auto & Vehicle Manufacturers industry. You can check out the additional WKHS Ratings (Growth and Momentum) here.

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