NIO (NYSE:NIO) stock has dropped precipitously due to the Chinese Evergrande debacle. The embattled Chinese real estate developer and its troubles are having a massive effect on Chinese stocks and international markets.
The markets reacted strongly to the news, and there was a massive selloff, much like we saw at the start of the novel coronavirus pandemic.
Several companies with robust operations and prospects could do little as market caps evaporated. The Evergrande crisis is yet another example of a singular event having a broad-based effect in domestic and international markets.
Nio, for example, is an excellent EV play that is starting to scale up production in the biggest EV market in the world, China. Every month delivery figures smash past estimates, illustrating the growth potential of the company.
NIO also enjoys a strategic relationship with a local Chinese government. That will do wonders to alleviate the fears of certain investors regarding regulatory pressure.
The current Evergrande crisis reminded several analysts of the Lehman Brothers collapse in 2008. While it has undoubtedly created shockwaves in the Chinese property market, that comparison seems like a stretch. For one thing, the Chinese government has the policy space and the resources to tackle this crisis.
Although transparency has not always been its forte, the Xi Jinping-led administration understands the value of this enterprise, which has liabilities equal to 2% of China’s gross domestic product.
Evergrande has inked an agreement with domestic bondholders to avoid default on a key bond payment, but the company is not in clear waters. It has a debt pile of $310 billion to handle, so the agreement will help calm the nerves.
Plus, unlike Lehman, which held risky financial assets, Evergrande holds the land. The value of land is far more stable than financial assets.
In addition, the Chinese government has a personal interest in making sure the situation does not get out of hand.
Nio, Evergrande and Continued Production
This crisis has very little to do with NIO, an EV company on the receiving end of large government assistance last year during the height of the pandemic. Although China is the largest EV market globally, the sector is still at a nascent stage.
There is no reason for the government to clamp down on this space because there is no monopoly to go after. Hence, investors need to rest easy. Any concerns they have regarding the Evergrande situation having a huge impact on NIO are far-fetched.
The one issue that will significantly affect NIO moving forward, though, is the semiconductor supply shortage. There are varying estimates regarding when we will see the back of this crisis.
Nevertheless, the shortage has already made its mark on several EV companies, including NIO. The Chinese EV giant revised its delivery guidance for the third quarter to between 22,500 and 23,500 vehicles from the previous outlook of 23,000 to 25,000 vehicles.
The situation is not unique to NIO.
Several companies have had to scramble and change their production schedules. Most analysts do not believe this issue will be resolved by the end of the year. Some even suggest it could take all of next year to get a handle on the situation.
Nevertheless, NIO has the liquidity to finance its expansion and survive any tough times. At the end of June, cash and short-term investments stood at $7.48 billion. To add to the position, in September, NIO announced a $2 billion stock offering that would shore up its balance sheet for any testing times ahead.
Right Time to Buy NIO Stock
Do not be deterred by the Evergrande issue or possibilities of oversight by the Chinese government. Both of these issues do not impact NIO directly.
In the meantime, NIO continues to record rampant growth in sales and deliveries. As EV adoption accelerates, NIO will continue to do well in the coming years.
Considering the size of the Chinese EV market and the discount at which it is trading, NIO stock is a steal.
On the publication date, Faizan Farooque 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.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.
