Chinese electric vehicle (EV) maker Nio Limited (NYSE:NIO) has been an interesting stock to watch from the sidelines, for sure. Investors in NIO stock have been on quite the ride in recent months.
Shares of the EV maker have seen a whopping 1,300%-plus return over the past year. Hey, a 13-bagger isn’t bad.
However, year-to-date, this stock is down over 25% at the time of writing. The entirety of this decline (and then some) has come from this past month, which provided a -22% return for investors.
Now, that’s some bearish momentum, and many investors may stay away from this stock for good reason. In fact, I discussed in mid-February why I’d be sitting on the sidelines with this growth name. Its valuation didn’t make sense then, and though it’s improved somewhat, this is still an ultra-pricey stock.
However, being the optimists we are at InvestorPlace, let’s look on the bright side. Here’s a bullish case on why NIO stock could be an intriguing buy at these levels.
Less Political Risk Could Be a Tailwind for NIO Stock
One of the interesting bull theses I’ve seen thrown around of late is Nio’s Chinese presence being its key long-term growth catalyst. Indeed, the Chinese EV market is expected to be massive going forward. Projections are that China could transition to entirely EV/hybrid cars by 2035. Additionally, China is selling more than 1 million additional EV cars per year than in the U.S.
Accordingly, if that gap grows, companies like Nio with a Chinese home base will be the preferential domestic choice in this growth market. The Chinese government isn’t playing coy with the fact that it plays favorites. That’s not something likely to change anytime soon.
Of course, that’s not if American EV manufacturer Tesla (NASDAQ:TSLA) has anything to say about it. Indeed, Tesla’s making a push for global domination in the EV market. Its valuation depends on it.
The company’s opened a manufacturing facility near Shanghai. The construction time? Less than a year. So far, Tesla’s growth in this market has been incredible, with the Chinese market now accounting for roughly 20% of Tesla’s overall revenue.
Indeed, the company’s CEO Elon Musk has done everything he can to create a positive working relationship with the Chinese. However, in recent days, it appears U.S.-China relations have taken a big hit.
What is believed to be the result of the aforementioned political squabbling, the Chinese government announced it was restricting the purchase of Tesla vehicles by military staff and employees of state-owned companies.
The same day the announcement came, NIO stock rose more than 3%.
Thus, it appears there’s a serious thesis that can be made right now that NIO stock is lower-risk, at least, from a political perspective, than many of its foreign peers. For those looking for Chinese EV growth, that’s a good thing.
But, Can Nio Expand Into the U.S.?
The flip side of Nio’s preferential treatment domestically could be a headwind for this stock in its pursuit of foreign growth.
Indeed, Nio has recently purportedly looked at expanding into the U.S. sooner than expected.
This comes following announcements made by the company that it’s looking to enter the European market in 2022. That’s relatively quick, and appears to be a key catalyst in the rapid share price increase we’ve seen since November, when the announcement was made.
However, Nio’s U.S. expansion efforts may hit some resistance, if U.S.-China relations don’t improve.
President Joe Biden’s Buy America stance doesn’t exactly jive with Nio’s plans. Indeed, this administration could be tougher on foreign producers than the previous one.
Conclusion
Nio is a stock with an interesting bull thesis right now. Indeed, I can understand why investors own this name. In the context of how overvalued the entire EV sector is today, its valuation now looks a lot better. Additionally, Nio’s potential for a long-term dominant position in the Chinese EV market isn’t one that should be taken for granted.
However, I think investors have a range of growth options available to them at much better valuations today. It’s easy to understand why others would own a stock. However, individual investors need to make their own assessments of the fundamental value of an equity before purchasing it.
I’ve done that, and the math still doesn’t work out for me.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.
