Everything was going just right for Nio (NYSE:NIO). Then, seemingly overnight the tables turned and NIO stock started falling. Now, shares are plunging once more without any major company news. So what do you need to know about NIO stock? And why is the beloved Chinese electric vehicle maker struggling?
To start, investors should understand the broad narrative. Nio, along with Chinese EV makers Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI), has been performing very well in 2020. This is because electric car stocks red hot, and the Chinese market is rapidly growing. It also means that, beyond specific company announcements, these three stocks tend to move together.
Over recent weeks, investors will find that a couple of catalysts have continued to hit NIO stock, LI stock and XPEV stock. With that in mind, here are three reasons Nio shares are plunging today.
Reason No. 1: The Threat of Regulation
Last week, we saw a similar plunge in the three leading Chinese EV stocks. At the time, many investors were worried about government regulation. Why? Well, the Chinese National Development and Reform Commission asked its local branches to submit details about electric vehicle projects. Calling out two companies in particular, it seemed the government was interested in levying regulations.
This would make some sense, as the market continues to explode. Although U.S. investors are familiar with the Nio, Li Auto and Xpeng trio, there are hundreds of EV makers in China. And even further, these EV makers continue to push out models. In fact, Evergrande Auto, one of the two companies in question, unveiled six new models in August 2020.
The bottom line? Although regulation would impact the industry, there is no indication that Nio is explicitly at risk. Plus, as we reported earlier this week, Nio was featured on a Chinese TV program. If anything, this suggests the company will continue to have national support.
Reason No. 2: Delisting Threat Weighs on NIO Stock
Earlier this week, another reason for the plunge emerged. On Wednesday, the U.S. House of Representatives passed the Holding Foreign Companies Accountable Act. At its core, this bill would allow U.S. stock exchanges to remove foreign companies if they fail to comply with certain audit processes. Almost immediately, some investors took this to mean NIO stock would soon be kissing the New York Stock Exchange goodbye.
Sure, there is reason for investors to be aware of this legislation. However, it could actually be a good thing. As we have seen with Luckin Coffee (OTCMKTS:LKNCY) and Kandi Technologies (NASDAQ:KNDI), sometimes investors chase up an equity before they really understand the business. When a short-seller report comes out and alleges fraud, everything turns upside down.
It seems that the Holding Foreign Companies Accountable Act is more about preventing the next Luckin situation, not about targeting NIO. If you are an EV bull, do your own research. Take a look at company auditing practices and find out what this bill could mean for those businesses in your portfolio.
Reason No. 3: Nio Falls Thanks to Peer Weakness
A last reason for the plunge in NIO stock today is likely that Xpeng and Li Auto are struggling. Yesterday, a UBS analyst downgraded XPEV stock, citing its interstellar move. Additionally, LI stock is falling Friday after a public offering of common stock that put shares at a 10% discount. Although the actions of Xpeng and Li Auto do not directly affect Nio, many investors consider these equities in the same basket. That means when an analyst criticizes Xpeng, Nio bulls might take it to heart.
As we head into the weekend, here is the bottom line. Do your own research and keep an eye on NIO stock and its peers. Try not to panic on headlines alone.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.