Nio Inc (NYSE:NIO) is often referred to as the Tesla (NASDAQ:TSLA) of China. And like Tesla — and the stock market in general for that matter — Nio stock took a hit on Friday as the trade war between the U.S. and China escalated.
After closing at $3.02 on Thursday, NIO ended Friday down 3.3% to $2.92. Not as bad as Tesla’s 4.84% slump on the same day, but there is no doubt that investors are wary of what increasing tariffs could do to the Chinese luxury-electric-vehicle maker.
The Trade War Worsened
For an explanation for the Nio stock price drop on Friday, look no further than President Trump’s Twitter (NASDAQ:TWTR) account.
The trade war with China ramped up significantly as the week closed. China announced new retaliatory tariffs on U.S. products on Friday. President Trump countered by announcing that tariffs on $250 billion of Chinese goods would be increased from 25% to 30%, starting on Oct. 1. The President also threatened to increase, from 10% to 15%, the tariff on $300 billion worth of Chinese goods that is scheduled to go into effect on Sept. 1. With the spat ratcheting up, the stock market in general was hit, with the S&P 500 Index tumbling 2.59%.
The trade war has been bad for Nio stock price, since any hit to the Chinese economy is likely to impact demand for luxury vehicles, including NIO’s luxury electric SUVs. The company already cited the conflict as a concern in its July 2019 Monthly Delivery Update:
“China’s macroeconomic and auto market conditions remained challenging, exacerbated by the U.S.-China trade conflict and the decline in passenger vehicle sales on a year over year basis for 13 of the past 14 months.”
Recall and Layoffs
The challenges associated with the trade war are bad enough, but additional bad news has battered Nio stock price in 2019. A series of fires involving Nio’s ES8 SUV resulted in a highly publicized recall. The bad PR surrounding the incidents hurt. Additionally, partly due to Nio’s focus on addressing the ES8’s battery issues, the company reported new car deliveries of just 837 in July. That’s down significantly from the 1,340 it delivered in June. The company explained the decrease:
“In July we completed our voluntary battery recall for 4,803 ES8s. During the month, we prioritized battery manufacturing capacity for this effort, which significantly affected our production and delivery results. In addition, some deliveries were pushed forward into June in anticipation of further electric vehicle subsidy reductions that took effect at the end of June.”
However, any sign of faltering production is a red flag for Nio stock price.
NIO is also expected to implement more layoffs, with the latest round expected to reduce its headcount by as much as 1,200. While layoffs help to reduce operational expenses, when a company repeatedly cuts staff, concerns naturally arise that there may be a lack of demand for its products.
What’s in Store for Nio Stock
Despite the beating suffered by Nio stock price in 2019 — it’s off nearly 53% in 2019 and 71% since climbing above $10 in April — Nio stock could conceivably bounce back. The company’s new and more affordable ES6 SUV is in production and the ES8’s battery recall was completed in half the expected time.
Assuming the company can ramp up production now that its focus is off the recall, and assuming the trade war doesn’t further damage the Chinese economy and dampen demand for luxury electric vehicles, it’s possible that Nio stock could still recover. The majority of analysts currently either rate NIO as a Buy or a Hold, suggesting some have faith that the company will soon start firing on all cylinders.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
