The lesser-known Chinese electric mobility scooter manufacturer Niu Technologies (NIU) has been surging lately despite a sharp pullback in the EV stocks owing to a semiconductor chip shortage and asset bubble concerns. Will NIU be able to capitalize on this market slump to increase its market share, or is the stock also due for a trend reversal? 

Chinese electric vehicle (EV) manufacturer NIU Technologies (NIU - Get Rating) has been making headway in the red-hot industry’s dominant players witness a sharp pullback amid a global semiconductor shortage.

Shares of NIU have surged 34.3% year-to-date, while shares of industry giants like Tesla, Inc. (TSLA - Get Rating) and Nio Limited (NIO - Get Rating) have declined over this period. While the decline in TSLA stock can be attributed to its premium valuation despite low profit margin, NIO shares plunged as the company reduced its delivery guidance for the first quarter of 2021 and temporarily halted production amid the global semiconductor shortage.

NIU’s ability to retain its momentum has made it one of the most promising EV stocks in the market. Specializing in smart electric scooters, NIU’s compact products have been a big hit in the world’s most populous country. However, a global semiconductor shortage is expected to hit NIU soon because the company is heavily dependent on processing chips required in electric mobility scooters. Furthermore, the stock’s skyrocketing valuation might make investors exit their position amid investors’  rotation away from overvalued companies.

Here’s what we think could shape NIU’s performance in the near term:

Current Condition of Chinese EV Industry

China has retained its title as the largest EV market in the world and is projected to sell 3.7 million vehicles this year, according to a Statista report. However, Europe dethroned the Eastern giant to become the fastest growing EV market in 2020, with sales rising 137% year-over-year.

The growth of the Chinese EV market is two-faced. The domestic EV market is benefiting from abundant rare earth material deposits, and Chinese EV manufacturers have an  advantage because the Chinese currency is witnessing its worst month since the U.S.-China trade war began. With lower exchange rates making them more competitive, the Chinese EV industry is set to grow at record levels.

However, a global semiconductor shortage has forced major companies such as NIO to temporarily halt production. Furthermore,  with relations between the United States and China very tense , Chinese EV companies could  miss out to a degree  on the electrification of the U.S. automotive industry.

Trading at a Premium Valuation

In terms of non-GAAP forward p/e, NIU is currently trading at 51.45x, 172.7% higher than the industry average 18.87x. Its forward ev/ebitda and price/sales multiples of 27.90 and 4.08, respectively, are significantly higher than  industry averages.

Also, the company’s forward price/cash flow ratio of 77.05 is nearly 400% higher than the industry average  15.51.

Consensus Price Target Indicates Immense Upside Potential

Five Wall Street analysts have provided price targets for this stock, with a high forecast of $275.90 and low forecast of $236.48. NIU’s median target price of $252.87 indicates a 596.4% potential upside.

POWR Ratings Reflect Uncertain Prospects

NIU has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

NIU has a C grade for Growth, and D for Value. While the company’s revenues have increased 17.7% year-over-year, its ebitda and EPS have declined 7.3% and 13.7%, respectively, over this period. This justifies the company’s Growth grade. The stock’s premium valuation is in sync with the Value grade.

Of the 51 stocks in the B-rated Auto & Vehicle Manufacturers industry, NIU is ranked #29. In addition to the grades we’ve  listed, one  can check out NIU Ratings for Sentiment, Stability, Quality, and Momentum here.

Click here to view the top-rated stocks in the Auto & Vehicle Manufacturers industry.

The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Bottom Line

NIU failed to maintain its profit margins in its  last reported quarter. While the company’s revenues increased 25.3% year-over-year to RMB672 million in the fourth quarter, ended December 31, 2020, its net income and EPS declined from the same period last year. Moreover, China has been rolling back its EV consumer subsidies, as announced by the country’s Ministry of Finance. These developments amid a global semiconductor crisis have put a damper on NIU’s growth potential. Thus, we think investors should wait until the markets stabilize before investing in the stock.

NIU shares were unchanged in after-hours trading Thursday. Year-to-date, NIU has gained 32.98%, versus a 7.50% rise in the benchmark S&P 500 index during the same period.