Nio (NYSE:NIO), the electric automaker dubbed the “Tesla of China” slumped almost 4% on Friday, extending a dismal run, during which Nio stock price has plunged 39% this month and nearly 60% this year.
Following Friday’s close of $2.42, one share of Nio stock barely costs more than a single Powerball ticket and there is plenty of debate regarding which might be the better investment. There could be more pain ahead for Nio stock because, although Nio stock price has been plummeting, sell-side analysts have been slow to trim their price targets on the stock.
The average analyst price target on Nio stock is $7.64, or about triple where the shares trade now. Last month, Bank of America Merrill Lynch analysts cut their price target on Nio stock to $3, which looked like a good idea at the time. One of the reasons for that reduction was increased competition in the China market from Tesla (NASDAQ:TSLA).
Ominous Signs for Nio Stock
TSLA is not “perfect.” TSLA stock is down more than 32% this year and there is seemingly always plenty of controversy surrounding the company. That said, Tesla is far better-positioned in the global electric-vehicle market than Nio, and TSLA is probably in better shape even in China.
It is not a good look for Nio stock price to be tumbling to levels that make cups of regular coffee at some establishments more expensive than Nio stock. Certainly not when the electric-vehicle market is growing.
“Battery-powered electric vehicles represent just 2.1 percent of global new auto sales, the equivalent of 2 million vehicles. Sales of EVs are forecast to jump to 2.7 million this year,” according to Nasdaq.
Nio stock serves as a reminder that when it comes to thematic investing, picking individual stocks is hard and potentially risky. Investors who have opted for broader approaches to electric-vehicle investments are being rewarded this year. For example, the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV) is up 10% year-to-date, making Nio stock look dreadful by comparison.
The epic problem with NIO is that the company’s sales are sliding while overall electric-automotive sales are expected to rise. Adding to that, NIO CEO William Li appears blasé about the company’s faltering sales.
“At NIO Inc., the Tesla Inc. wannabe from China, electric vehicle sales are plummeting, losses mounting and the stock price cratering,” according to the Detroit News. “But founder and Chief Executive Officer William Li can’t see what all the fuss is about.”
Li added that NIO will be profitable “in a few years.” The Nio CEO is nothing if not ambitious; even though there are several thousand electric vehicle makers in China, Li is evaluating ways for his company to enter the U.S. market. Ambition is nice, but not at the expense of profitability and share price, two issues NIO is struggling with.
The Bottom Line on Nio Stock: Not Now For Nio
It is easy to be seduced by stocks with low price tags, but a name that appears to have value because of a cheap price can often be a value trap. There are quality stocks out there with single-digit prices. Nio stock is not yet a member of that group.
Remember, stocks have low prices for different reasons, but few, if any of those reasons are positive, as Nio stock highlights. Just because something is cheap does not mean it is a good deal.
As was noted earlier, analysts have been slow to downgrade Nio stock and lower their price targets on Nio, partly because some have been busy denigrating TSLA. They are likely to get around to slamming Nio stock, too. The stock appears to be bereft of catalysts and will likely head lower until it can deliver positive sales and profitability surprises
Todd Shriber does not own any of the aforementioned securities.