News of one of its vehicles being involved in a fatal autopilot crash may be making the rounds, but expect it to be at most only a brief hiccup. With Nio (NYSE:NIO) stock, it’s other factors that you should worry about.
As you may know, China’s regulatory crackdown has been the main thing sending shares in the EV maker lower since July.
This, along with another issue that I’ll discuss in a moment, could put more pressure on shares in the months ahead.
Even as the company anticipates delivering more vehicles this quarter than previously expected.
Granted, besides improved guidance numbers, Nio stock has other factors on its side. Several catalysts could pay off down the road, and investors may again have reason to pay $45, $50, or even $60 per share for the stock.
These long-term catalysts aren’t going to help out the stock in the short term, though. With the above-mentioned negatives likely weighing on its further, there’s little to dive in at today’s prices.
Why NIO Stock Could See More Declines Ahead
The China crackdown story has been the largest factor in Nio’s slide from more than $50 per share down to around $39 per share.
Even if these worries dissipate in the coming months, there’s something else that could put pressure on this richly-priced “megatrend” stock: its high valuation.
Since the middle of last year, investors have put valuation concerns on the back burner when it comes to fast-growing companies, particularly ones in “hot industries” like electrified vehicles.
The “growth at any price” mantra may not be as strong now as it was back in February.
Yet based on its current price-to-sales or P/S valuation of 10.6x, investors have no qualms valuing Nio stock based on its future potential rather than current results.
That being said, things could be about to change.
As seen from recent quarterly results and guidance, the company delivered numbers in line with projections last quarter and upped its delivery outlook for the current quarter (ending Sep 30).
If it’s not going to fall short of expectations shares still could still fall because of compression among growth stocks going forward marketwide. This could bring down its valuation/stock price, even as the company’s overall prospects remain unchanged.
The Jury’s Still Out on Long-Term Catalysts
I’ll concede that the long-term bull case may still be intact with NIO stock. It may have several ways to extend its growth runway in case it hits a wall when it comes to growing its main business (selling luxury EVs in China).
As it makes progress with its recently-announced plans to launch a mass-market EV brand, Nio may have the potential to take on global automotive powerhouses like Toyota (NYSE:TM) and Volkswagen (OTCMKTS:VWAGY).
Both factors could help it justify and grow its current $59.5 billion market capitalization. The problem is, it may have big plans, but the company will need to deliver before these plans can really move the needle for NIO stock.
Only time will tell whether it can take on Volkswagen and Tesla in the European luxury EV market, not to mention incumbent luxury automakers like BMW (OTCMKTS:BMWYY) and Daimler (OTCMKTS:DMLRY), which are also moving into EVs in a big way.
Taking on automakers like Toyota with a mass-market brand could be easier said than done as well.
Along with heavy competition for market share, there’s also the question of profitability. Getting its core business out of the red still remains a work-in-progress. It may take even longer for its recently-launched expansion to become profitable as well.
The Bottom Line: Avoid Nio
I may remain bearish about Nio, but I’ll admit it may still have the makings of a long-term winner.
If it can continue to grow its Chinese luxury EV business, expand into Europe and develop a mass-market EV brand, my concerns about its sky-high valuation could appear very short-sighted.
Long-term, shares could hit prices well above the highs Nio made earlier this year. Yet that doesn’t mean it will stop trending lower anytime soon.
Even if it meets or beats projections in the quarters ahead. With this in mind, it’s best to continue avoiding NIO stock.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.