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Why Nio Stock Is Not Yet a Long-Term Buy

Shares of the Chinese electric vehicle maker Nio (NYSE:NIO) had a remarkable performance in the past year, returning around than 1,350%. In other words, $1,000 invested in NIO stock in April 2020 would now be more than $14,500.

A shot from the outside of a Nio (NIO) display room at night.
Source: Robert Way / Shutterstock.com

By comparison, the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL) is up about 175% in the same period. And, since hitting 52-week lows last spring, Tesla (NASDAQ:TSLA) has returned around 480%.

Nio shares hit a record high on Jan. 11. However, since then, profit-taking has kicked in, and so far this year, NIO stock is down over 20%, meaning the shares are now officially in a bear market. The stock is currently around $38.

Therefore, we will look at Nio’s prospects and discuss whether it remains a buy given the recent drop in the share price. Given the increased volatility in the markets in earnings seasons, Nio stock could decline further in April. Here’s why.

How Q4 Results Came

About 1.3 million electric vehicles were sold last year in China. Forecasters expect that to increase to 1.9 million EVs this year. China now has the largest EV market worldwide, followed by Germany, the U.S. and France. Therefore, Chinese automakers are increasingly in the limelight.

Nio markets cars exclusively in China, where it also offers battery charging services. Management released Q4 results in early March. During the quarter, Nio delivered 17,353 vehicles. It currently has three models:

  • ES8 (six- and seven-seater SUV) sales in the fourth quarter were 4,873.
  • ES6 (five-seater SUV) Q4 sales were 7,574.
  • EC6S (five-seater coupe SUV) Q4 sales were 4,906.

For 2020, the total number of deliveries was 43,728. A year ago it had been 20,565. Vehicle sales came at $946 million, an increase of 130% year over year. Revenue was $1 billion, up 133% from the previous year. Net loss per diluted share was 14 cents, a number wider than expected.

Most car companies are currently suffering from a global chip shortage. Nio’s management has also warned that it would have to cut production by over 20%. As a result, investors have taken some money off the table, especially in the shares of global car makers.

The Street has also been nervous about inflationary pressures in the horizon, as evidenced by the rise in U.S. Treasury yields. Furthermore, Chinese stocks are under pressure due to U.S. regulatory concerns. Given the new SEC laws, several China-based names could delist in the U.S. Therefore, a further move away from growth names like Nio stock might be in the cards.

In early April, Nio released its March and Q1 2021 delivery update. The automaker delivered 7,257 vehicles in March, up 373% from a year ago. Earlier this month Nio also marked the production of its 100,000th vehicle. Although these are important developments for a young company, investors were not impressed enough to buy into the share price.

The Bottom Line on NIO Stock

Over the past year, Nio has seen an epic renaissance, moving from a penny stock to an electric vehicle darling with a market capitalization of $62 billion. Given the growth of this segment in China as well as globally, the bull run in many global EV makers could still be in early stages. However, NIO stock’s price-book and price-sales ratios stand at 13.4 and 17.2, respectively.

This is a frothy valuation level for a company that sells around 50,000 vehicles  a year. By comparison, General Motors (NYSE:GM) has P/B and P/S ratios of 1.6 and 0.5. Therefore, it might still be too early to hit the “buy” button in Nio in April. The smart money is likely to wait longer before moving back into the shares.

It is also important to remember that most EV stocks move in tandem. As a new earnings season begins, quarterly metrics from other automakers will potentially affect Nio shares. For instance, a decline in the industry’s top names, especially in Tesla stock, could have an adverse effect on the Chinese group, too.

If you do not want to commit full capital to NIO stock, you might also consider ETFs that hold the EV maker as a stock. Examples include the First Trust NASDAQ Clean Edge Green Energy Index Fund (NASDAQ:QCLN), the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV), the KraneShares MSCI China Clean Technology Index ETF (NYSEARCA:KGRN) or the SoFi 50 ETF (NYSEARCA:SFYF).

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

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

Article printed from InvestorPlace Media, https://investorplace.com/2021/04/why-nio-stock-is-not-yet-a-long-term-buy/.

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