Buy the Nio Dip, or Heed the Rising Political Rhetoric?

Nio (NYSE:NIO) stock is always an interesting investment in my mind. Last year saw it rise meteorically as tailwinds for the electric vehicle sector blew unabated. But 2021 hasn’t been as smooth. 

Image of Nio (NIO) logo branded on the exterior of a corporate building.
Source: Sundry Photography / Shutterstock.com

Nio is being simultaneously pulled and pushed, so investors would do wisely to consider the various factors currently affecting share prices. 

Coming to America 

When I last wrote about NIO in late February, I noted that there were faint rumblings that Nio is preparing to enter the U.S. market. This idea was based off of the fact that Deutsche Bank analyst Edison Yu had found a job posting seeking a business planner for the U.S. market. 

The posting was taken down shortly after being reported by the Deutsche Bank analyst, but the rumor mill was by then in full motion. Yet, recent news out of China regarding renewed political fighting between the U.S. and China will lessen Nio’s opportunity, at least temporarily. 

Yu’s analysis indicates that Nio likely won’t achieve sales within the U.S. market before 2025. He cited the Biden administration’s softer stance on China as a factor that might accelerate that timeline. However, as a Chinese EV pioneer, Nio is a chair at what could be an increasingly acrimonious international summit. 

Tesla Blocked

The news that the Chinese government is restricting use of Tesla (NASDAQ:TSLA) vehicles by its employees and within vital state-owned companies provides a clear opportunity for Nio. 

The point of contention is unsurprisingly data leak concerns. A government security review by Chinese officials of Tesla vehicles raised concerns. Cameras that record constantly were pinpointed as a concern for national security leaks. 

The Wall Street Journal reportsthe Chinese government has told some of its agencies to ask their employees to stop driving Tesla cars to work, the people said. Some of the people said Tesla cars were also banned from driving into housing compounds of families with personnel working in sensitive industries and state agencies.”

Analysts are scrambling to judge what the effect  will be on Tesla’s sales, but a Teslarati report speculates “it likely will not be monumental as no public ban has been rolled out.”

Tesla’s loss is going to be Nio’s gain. 

Nio’s Opening

Clearly, Nio will be garnering more attention within China on the news. As a Chinese company with significant government ties, Nio inherently benefits from the news. Nio closed up 4.1% on March 19, presumably related to the news. 

Investors looking for an EV play on China’s EV dominance will be increasingly focused on Nio now.  

Buy the Dip?

NIO stock is down 37% since Feb. 9. Increasing concerns about rising interest rates in the U.S. have taken Nio down in a broader market sell-off. EV bubble speculation further increases the negative factors pulling Nio shares downward recently. 

Even prior to recent events, some analysts were confident in the ability of Nio shares to rise. Mizuho’s Vijay Rakesh initiated a buy rating for Nio at a target price of $60 on March 11. 

Eleven of the 19 analysts surveyed along with Rakesh were bullish on Nio’s price, with Rakesh setting the lowest target price among them. 

Sales Are Strong

Nio recently released its full year 2020 financial results. There is a lot to like. Nio continues to increase its deliveries, profits continue to rise along with margins, and losses from operations continue to get smaller. 

These factors should give investors the confidence they need to jump into a position in NIO stock. 

However, there are bigger factors at play.

Verdict

In the long term, NIO stock is bound to be a winner in my book. I believe it represents a generational opportunity in the transformational EV market. Yet, I believe that due to the larger factors at play, Nio shares will probably go sideways for a bit. It has an improved position in China, steadily increasing sales and improving metrics, but I believe it is a hold for now.

On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. 


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