After a more than 13-fold move higher in the past year, is the party over for China EV play Nio (NYSE:NIO) stock?
Nio is starting to slide after hitting all-time highs of nearly $67. So far, the decline hasn’t been that massive ($67 down to $55). But there’s good reason why it may be set to continue.
First, with the opportunity to “get in on the ground floor” with new EV plays, investors may continue to take profit with Nio and parlay their gains into new positions. Second, as the competition heats up in its home market of China, the fast-growing electric vehicle company may fall short of today’s sky-high expectations.
With both factors on the table, shares look more likely to sink than surge going forward. Keep this in mind before you buy in after the recent pullback.
There’s a Hot New EV Play
This EV startup may have gone public in 2018. But it wasn’t until 2020 that it became red hot among investors. The mad rush into this EV play came on the heels of investors bidding up Tesla (NASDAQ:TSLA) stock hand over fist.
Yet, it wasn’t just its potential of becoming the “next Tesla” that got investors excited about Nio stock. With its operating performance improving by leaps and bounds, triple-digit delivery growth helped to justify the stock’s multiple parabolic moves higher.
Even factors with an indirect impact on Nio’s prospects played a role in moving the needle. For example, President Joe Biden’s election does little to change the game for this China-based EV maker. But the epic post-election rally in EV stocks extended to this name as well.
But, even as the company’s growth may partially justify its current valuation ($85.6 billion), further gains may be out of reach for Nio stock. Why? With a new hot EV stock on the block, some of the enthusiasm that sent this stock to new highs could be starting to dissipate.
I’m talking about Churchill Capital IV (NYSE:CCIV), which is inching closer to its rumored merger with hot EV startup Lucid Motors. The “story” behind Lucid is that it’s a strong contender to give Tesla a run for its money. With this interesting EV situation now on the scene, forget about investors bidding up Nio in the hopes it’s the “next Tesla.”
Instead, investors are bidding up the soon-to-be Lucid stock in the hopes it’s the “next Nio.”
This alone doesn’t make the bear case. However, it could limit its ability to continue melting up to new highs. What could really hurt Nio stock going forward? The competition heating up in its home market.
Competition from All Sides Could Affect Growth
Admittedly, Nio bears such as me will look for any indication that all that glitters isn’t gold with this much-hyped EV play. A year back, when it appeared to be on the brink of bankruptcy, those negative on its prospects thought this former penny stock was headed to zero.
Instead, it went on its aforementioned 13-fold rally. However, just because the stock has proven its bears wrong so far doesn’t mean it’ll continue to do so. Besides the risk retail investors cycle out of Nio, and into the newest EV play on the block, there are factors related to the company’s underlying business that could negatively affect its share price.
That would be the risk of competition. Sales of new energy vehicles (electric and hybrid-electric) in China are set to grow 41% in 2021. But, as the competition heats up, the big surge in underlying demand may not be enough for growth to come in-line with projections.
Competition is coming at it from all sides. There’s rival China-based EV companies like Xpeng (NYSE:XPEV) and established global EV makers like Tesla. And, increasingly, there’s competition from global legacy automakers like General Motors (NYSE:GM) and Volkswagen (OTCMKTS:VWAGY).
Year-over-year, Nio’s sales have increased substantially. But, sequentially (month-over-month), delivery growth was only 2%. Shares today remain priced based upon projected revenue growth nearing 100% in the coming year. Even if the company grows by 50% in the coming year (still an impressive figure), shares could continue to fall, as it becomes clear the stock way ahead of itself in the past 12 months.
Steer Clear of Nio Stock For Now
At current prices, Nio sports a market capitalization of $85 billion. As many have noted (including InvestorPlace’s Josh Enomoto) that’s above GM’s current valuation. But, if competition gets the better of it, and growth falls short of projections, don’t expect this to last.
Add in falling interest among trend-following investors, and there’s more at play to send Nio stock sinking rather than surging in the near term.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
