Nio Is in the Eye of the Storm, So Avoid It

With shares holding steady for the past month, should you buy the pullback in electric-vehicle (EV) maker Nio (NYSE:NIO)? Not so fast. NIO stock still remains popular among investors, even after its more than 40% slide from its all-time highs.

A close-up shot of the Nio (NIO) ES8 vehicle.
Source: xiaorui / Shutterstock.com

As I detailed back on Apr. 9, investors were satisfied with its solid March delivery numbers. However, that’s still not enough to sustain today’s valuation, much less a rebound back towards prior highs of around $60 and beyond. Upcoming news could put more pressure on this stock, which was one of 2020’s top performers.

What sorts of new developments could hurt Nio? Mainly, the potential for April delivery numbers to fall short of expectations. March numbers, which showed a month-over-month increase of around 30%, may have been sufficient. But given much of that increase was due to the Lunar New Year falling in the prior month, this month’s sequential growth could be substantially lower.

Subsequent developments could show that sales growth for 2021 will fall short of analyst projections of 107%. If Nio fails to deliver in the growth department, it’ll be tough for shares to maintain their still-premium valuation with a forward price-to-sales (P/S) ratio of around 11.8.

Some may believe Nio’s upcoming expansion overseas — which I’ll detail soon — could move the needle again. However, it’s too early to tell whether that will be the case. With more at play to sink it than send it higher, continue to avoid NIO stock.

NIO Stock and Rising Competition in China

Until we see April delivery numbers, which will hit in early May, it’s a bit premature to write Nio off completely. The company could deliver blockbuster numbers for April, proving longtime bears on this stock (such as myself) wrong once again.

Yet, there’s still plenty at play to back up the idea that present and future results will fall short. How so? Namely, competition. I’ve previously detailed how not only competition from China-based rivals — like BYD Company (OTCMKTS:BYDDF) and Xpeng (NYSE:XPEV) — but also global competition from Tesla (NASDAQ:TSLA), Volkswagen (OTCMKTS:VWAGY) and others could affect growth.

This factor alone could negatively impact Nio’s delivery numbers in the near-term. The result? Much lower-than-expected growth in 2021, which in turn could drive a further retraction in the valuation of NIO stock.

And in the long-term? Based on recent remarks from Deutsche Bank’s Edison Yu, there could be another competitive threat on the horizon. That would be the possibility of non-automotive Chinese companies like Baidu (NASDAQ:BIDU), Foxconn and even Huawei throwing their hat into the EV ring.

It may take years for these companies to enter the automotive space. However, that could nevertheless prevent Nio, which is still a small player, from growing into the major name its current $64.8 billion market capitalization implies. Because of this, Nio’s planned expansion into Europe really needs to go off without a hitch.

Global Expansion May Not Save the Day

As InvestorPlace’s Brenden Rearick wrote on Apr. 16, Nio is making progress in its plans to enter the European market. On May 6, the company will complete its initial expansion there, with its first showroom slated to open in Norway.

Of course, moving into Europe will help the company diversify geographically. On top of that, though, it could pave the way for Nio’s eventual expansion into North America. Most of Nio’s valuation hinges on its expected growth in its home market. But another factor in its high market cap is the expectation that it will become the “next Tesla,” a major force in the global EV market.

It’s still too early to tell whether this global expansion will pay off, though. Naturally, these new markets will be just as competitive, if not more, than Nio’s home market. For instance, Volkswagen will have a big advantage, with Europe being its home turf. Daimler (OTCMKTS:DMLRY) and BMW (OTCMKTS:BMWYY) could be formidable competitors as well.

True, we may see shares get a short-lived boost on the heels of this European news. However, investors should wait for initial results to come in before pricing this factor further into NIO stock.

 NIO Stock Is Steady Now, But Could Drop Again

March’s delivery results were enough to keep Nio shares steady. However, in the near-term, we could see more data that further damages the bull case here. This may result in more valuation contraction for this richly priced “story stock.”

And, in the years ahead, rising competition in China coupled with the risk of its European expansion could sink NIO back towards prior prices.

So, while NIO stock is holding steady for now, this could just be the eye of the storm. With the risk that subsequent news sinks it to $30 and below, it is best to continue staying away from this name.

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, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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