NIO (NIO  ) was flat following its Q3 results which topped analysts' expectations. The company's current challenge is to scale production while maintaining quality. Overall this year, NIO has been one of the big winners in the stock market with a 1,250% gain YTD.

Along with Tesla (TSLA  ), NIO has emerged as one of the leading companies in the EV space. A certain amount of froth has developed in the sector with companies that are years away from even developing a prototype having multibillion-dollar valuations. Despite its $70 billion valuation, NIO seems less frothy than many of its peers, since it has demonstrated that customers want its product given the long waitlist for its product and an ability to manufacture at a smaller scale.

Inside the Numbers

NIO's Q3 results confirm that its momentum is continuing, although it doesn't really validate its valuation. For example, its net loss came in at $0.14 per share which was better than expectations of $0.17 per share. Revenue was $666.6 million which was slightly better than expectations of $653.7 million.

However, the most important metric for NIO is its vehicle deliveries as it's a signal that it's able to increase production to meet demand. Further, NIO eventually needs to sell more than a million cars a year to justify its current valuation. In Q3, NIO 12,206 cars which was an improvement from 10,400 in Q2. Another positive data point was the improvement in gross margins which shows that costs are coming down as it scales up.

Stock Price Outlook

From a macro sense, the EV bull market makes sense considering that growth opportunities in the market are scarce, liquidity is abundant, and governments around the world are subsidizing production and consumption to reduce pollution.

Yet, the magnitude of the bull market is puzzling. EV companies, collectively, have almost as much market cap as all the legacy car companies combined. And, many of the car companies are also working hard to develop their own EVs. Ford has a $35 billion market cap and sold 17 million vehicles in 2019.

It's possible that the market could be correct in its assumption that more EVs will be sold in 2030 than gas-powered vehicles, but it also doesn't mean that all EVs are a buy. The Internet bubble was similar in that many of the optimists' forecasts about the power and disruption of the Internet have been realized but only a handful of tech stocks were able to deliver gains for investors.

However, in the short-term, it's hard to fathom what would stop the sector's momentum. Therefore, NIO is a fantastic trading vehicle for short-term oriented traders but probably not a good investment given its steep valuation and numerous hurdles to justify this valuation.