Should You Buy the Dip in NIO Stock?

There’s no denying that electric vehicles are a trend worth watching. The auto industry looks likely to experience a major shift over the next few years as autonomous vehicles and electric cars gain momentum, so investors are wise to be adding EV companies to their portfolios. While Tesla (NASDAQ:TSLA) is likely the first name to come to mind when it comes to electric vehicles, Chinese counterpart Nio (NYSE:NIO) has also been on the radar in recent months. 

Should You Buy the Dip in NIO Stock?
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After popping at the end of February on the heels of a 60 minutes special that cast the firm in a favorable light, NIO stock has lost nearly half of its value over the course of a few days and hasn’t been able to recover since. At just under $6 per share, NIO is trading 40% lower than it’s all-time high of $10 per share. Does that mean now is a great time to pick up Nio Inc. stock, or is this dip the beginning of a larger downward trend?

Earnings Disaster

The reason for NIO stock’s decline was a worse-than-expected earnings report. The firm’s fourth-quarter results showed a $509.5 million net loss, but even more troubling was NIO’s lackluster forward guidance. Management is expecting deliveries to be weak for the first half of the year and plans to build a Nio factory have been put on hold for now. 

A big reason for the gloomy outlook is uncertainty regarding the Chinese economy and questions about whether or not the government will subsidize electric vehicles purchases going forward. 

No matter the country, the success of automakers is closely tied to economic health. But in the case of China, that uncertainty is underscored. Historically, Beijing hasn’t been transparent about the nation’s economic health and that creates an added layer of risk for Chinese stocks — that’s especially true for NIO stock, whose luxury cars are highly dependent on the ultra-rich having money to spend. 

Overly Excited Investors

Another reason we’ve seen such a large decline in NIO stock is the fact that it’s rally was essentially based on thin air. One 60 Minutes special shouldn’t be enough to take a stock 30% higher — especially considering it didn’t reveal any earth-shattering information about the company itself and its growth potential. 

That added hype just before Q4 earnings was disastrous for NIO stock, especially considering management had some bad news to deliver.

Future Potential

So, now that NIO stock has come back down to earth, investors need to consider whether or not the firm has potential to rise significantly in the future. The short answer here is yes. Right now, Nio is the only luxury electric vehicle company in China, a country with the largest automobile market in the world. Electric vehicles are catching on fast there as well and, if Beijing continues to promote their use through legislation and subsidies, Nio would certainty benefit. 

Many point to NIO as the “Tesla of China” and, from that perspective, it looks like a pretty good investment opportunity. After all, who wouldn’t want to jump in a time machine and buy shares of Tesla back in 2013 when the share price was in the mid-$30s. 

Risky Bet

However, NIO stock isn’t quite Tesla. For one thing, Tesla was first. Sure Nio is first in China, but it still has to compete with competition from TSLA and others as it grows larger. 

Second, and perhaps more importantly, is the fact that NIO is a long way from being profitable. Gross margins are negative for Nio right now — that means it will be a long time before the firm is able to bring prices down and appeal to a wider audience. Tesla is currently working to bring prices down and expand its addressable market, but that has been incredibly difficult to do while still preserving profitability.

The Bottom Line

NIO stock is likely to make its way higher in the long-term, but it’s difficult to say just how long we’re talking. It could be almost a decade before NIO makes a meaningful jump higher and, during that time, we could see a lot of volatility due to economic conditions.

In short, NIO is a risky bet without a clear path to reward and for that reason, I’m going to stick to the sidelines.

As of this writing Laura Hoy did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media,

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