As Nio (NYSE:NIO) treads water around $13 per share, should you dive into Nio stock? Yes and no.
On one hand, it appears the EV maker is making faster-than-expected progress regarding its aims to become the “Tesla (NASDAQ:TSLA) of China.” Posting lower-than-expected losses, and record delivery numbers, it’s in a much better place now than it was earlier this year.
On the other hand, with enthusiasm for EV stocks sending it parabolic earlier this summer, shares are pricier than ever. Future potential remains fully priced into the stock. And then some.
Sure, just because the stock has reached a frothy valuation doesn’t mean it’s destined to head lower. As the narrative propping EV stocks continues, it will take a big shift to push shares to the single-digits.
Or will it? While there’s plenty to be positive about with Nio, there are many factors at play that could push shares lower in the coming months.
In short, the current risk/return proposition isn’t much in your favor. The best move? Avoid buying shares at today’s prices
Nio Stock at $13?
Is it “nothing but blue skies” on the horizon for this budding EV powerhouse? That’s the view of JP Morgan’s Nick Lai. Namely, due to the company’s chances of growing its Chinese EV market share from 5% to 14% by 2025. Yet, despite seeing good things ahead for Nio, the analyst currently has a “hold” rating on the stock and a $14 per share price target.
This is no surprise. Given the company’s impressive performance as of late, solid growth could continue. But, as shares have skyrocketed more than 232% so far this year, it’s reasonable to not want to dive in as shares trade near all-time highs.
So, what’s the risk? Namely, this touted “Tesla of China” fails to rise to the levels of its American counterpoint. Sure, with rising sales, it seems the company could pull off on its home turf what Elon Musk pulled off in the United States.
Yet, Nio’s ascension to Tesla-tier status isn’t set in stone. Firstly, as this commentator noted, the company still needs to establish itself as a leading EV brand. Sure, as EVs gain popularity in China, the company is well-positioned to build up brand equity.
But, as I discussed last month, the Chinese EV market may not be as hot as it seems. Add in heavy competition, and it may be tough for this upstart to keep up. And, without significant growth in the coming years, scaling to profitability will be a big challenge.
Granted, at least now Nio’s posting positive gross margins. Yet, if it becomes more apparent this company doesn’t have what it takes to become a profitable business, don’t expect the Tesla comparisons, which are driving today’s valuation, to last for long.
Why Shares Could Fall Back to Single-Digits
With the above-mentioned risk in mind, there’s more than just valuation concerns backing up the bear case for Nio stock. Sure, so far this year, this company has proven its many critics wrong.
Yet, besides the company’s “Tesla of China” status potentially unraveling, other factors could mean help push shares back to single-digits. InvestorPlace’s Laura Hoy listed a key one in her Aug. 12 article. That would be the risk U.S.-listed Chinese stocks like this one get delisted, due to rising tensions between the two countries.
But that’s not all! Overall enthusiasm for EV stocks may continue to cool, pushing names like Nio lower. Even as its underlying prospects remain the same. That’s not to say shares are bound to fall back to where they were earlier this year (under $5 per share).
Yet, it could mean shares tumble back to their early June prices (around $7 per share). With the “Robinhood effect” on EV stocks played out, the potential for shares making another parabolic move higher looks less likely now than they did a few months back. Simply put, shares don’t look like a screaming buy at around $13 per share.
Blue Skies May Still Be Ahead, But Don’t Buy At Today’s Prices
So, what’s the call now on Nio? Yes, the company does still has a shot at becoming the “Tesla of China.” But, it’s hardly a guarantee. And, as speculation in electric vehicle plays starts to wind down, shares are more likely to dip lower than make another epic move higher.
With risk/return not much in your favor, consider Nio stock a sell at today’s prices.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
