Nio Stock Has Some Headwinds, But They Appear Navigable

Current shareholders have every right to be frustrated by the performance of Nio (NYSE:NIO) stock this year.

A Nio (NIO) sign and logo on a tan concrete building.
Source: Sundry Photography / Shutterstock.com

After accelerating 1,173% in 2020, the company’s stock has been a basket case over the past eight months, falling 24% to its current price of about $38.

The shares are now down 40% from their all-time high of $66.99 reached in late January.

As the main electric vehicle company in China and the primary rival of Tesla (NASDAQ:TSLA), investors are rightfully wondering what it will take to turn around Nio’s share price and get it climbing again.

The latest positive news related to Nio stock came at the tail end of August when it was announced that the company will take a minority stake in Lotus Cars, the iconic and extremely high-end British sports car manufacturer.

Lotus, which is majority controlled by rival Chinese automaker Zhejiang Geely, is looking to raise $2.3 billion in order to “transform itself into an all-electric brand.”

Nio isn’t investing the entire $2.3 billion, but it is investing some money and is being given a slice of Lotus Cars in return. Lotus said it and Nio “will explore collaboration in areas including high-end intelligent EVs.”

The investment in Lotus Cars, which Zhejiang Geely has said it plans to take public as soon as next year, is positive for Nio.

However the collaboration pans out, Nio should be able to generate positive returns from its investment through the licensing of various technologies.

Another opportunity for positive returns is through Lotus’ eventual initial public offering (preliminary estimates have pegged Lotus’ value at $15 billion).

Collaborating with Lotus could also help Nio enter the world of ultra-high-end luxury sports cars, which is a lucrative and exclusive global market.

Record Orders and Nio Stock

Like all automakers, Nio is grappling with the ongoing shortage of semiconductors and microchips that has hobbled production this year.

Nio cited the chip shortage recently when reporting lower than expected sales figures for August that came in at 5,880 vehicles, down from 7,931 cars sold in July. 

However, the company also reported that its new orders reached a record high in August, demonstrating that demand for its electric vehicles remains strong.

Still, Nio revised down its third-quarter delivery forecast from between 23,000 to 25,000 vehicles previously to between 22,500 to 23,500, again due to the chip shortage.

Nio has also beefed up its plans to expand in Europe, announcing that it plans to open dealerships in five additional countries after launching in Norway, its first foray outside of China.

The company plans to begin deliveries of its ES8 large SUV in Norway this month and then move into Germany, the United Kingdom and elsewhere across the continent.

The company has received approval to begin mass production of its various electric vehicles on the European continent, opening up a major new market that should power future sales growth.

Ongoing Challenges

While Nio has achieved a lot of wins this year in terms of strategic investments and its plans for global expansion, the company continues to face some ongoing challenges.

The global shortage of semiconductor chips is the biggest issue currently affecting Nio, but the company is not alone.

Major automakers such as General Motors (NYSE:GM) and even rival Tesla have been forced to cut their vehicle production in recent months due to their inability to secure the critical chips needed to manufacture today’s cars, trucks and SUVs.

Analysts expect some relief from the semiconductor shortage next year.

A more uncertain issue that could have an effect on Nio is the political situation in China. Government officials in Beijing have been cracking down this year on major Chinese companies in the technology, cryptocurrency and education sectors in an effort to better distribute wealth.

The goal is to achieve what politicians are calling “common prosperity” in the nation of 1.4 billion people.

So far, government regulators haven’t targeted the domestic automotive industry, which remains comparatively small and comprised mostly of start-up companies such as Nio. But if the situation changes, it could prove problematic for Nio and its shareholders.

Be Cautious With NIO Stock

Nio has a lot working in its favor right now – the Lotus cars investment, a record number of orders for its vehicles and an expansion into Europe that looks very promising.

At $38 a share, the stock offers a nice entry point for investors at its current price. Over time, NIO stock should rise considerably.

In the near term, the company faces some uncertainty with the global chip shortage and political volatility in China.

As such, investors should proceed with caution regarding Nio shares. Start with a small position and add to it over time if a rally in the share price breaks out. If the stock falls further, be prepared to sell quickly.

Disclosure: On the date of publication, Joel Baglole 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.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia. 


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