After a rough 2021, investors are on the fence whether China-based electric vehicle (EV) maker Nio (NYSE:NIO) bounces back in 2022. Nio stock bulls and bears both make solid arguments. But for now, it may not be so much its fundamentals that determine which way it heads from here.
Instead, it may all come down to where sentiment is at for EV plays. In recent months, sentiment has shifted from very bullish, to a more on-the-fence view. Mostly, due to the prospect of higher interest rates. This has put considerable pressure on all growth stocks.
Some may be starting to argue that higher rates are already priced-in. This could suggest that further downside on valuation concerns may be limited. Yet with the growing chance the U.S. Federal Reserve is forced to act more aggressively to get inflation under control? The extent the Fed raises rates could wind up being greater than expected. In turn, more pressure on growth stocks. That means lower odds of another wave of “EV Mania.”
Without that, it’ll be tough for this former high-flier to make its way back toward its past high-water mark.
NIO Stock: Bull Case vs. Bear Case
When it comes to Nio, despite its poor stock price performance, it’s still not too difficult to build the bull case for it. Especially, as Deutsche Bank’s Edison Yu recently argued, given the automaker has a total of eight catalysts on tap.
Admittedly, many of these eight NIO stock catalysts are simply upcoming launches of new vehicle models. For example, the launch of the ET7 sedan in both China and Europe, as well as the launch of another sedan model, the ET5. But better performance for shares year is based upon more than just it bringing out new vehicles. Upgrades to its battery and driver-assistance technology could be catalysts as well.
On the other hand, you can just as easily formulate the bear case, on factors that go beyond just its rich valuation (8.67x sales). As a Seeking Alpha commentator opined earlier this month, Nio’s sales growth has slowed down throughout 2021. Despite the above-mentioned vehicle launches, this trend could continue. Besides citing slowing growth, the commentator also brought up the risk that the automaker’s expansion into Europe could erode margins. In addition, regulatory risk remains high with Chinese stocks.
Only time will tell which side is on the money when it comes to Nio’s performance over the next few quarters. I lean more toward the bear argument, yet concede the positives mentioned by the bulls could play out. Sales could reaccelerate, and regulatory/supply chain issues could clear up. Still, that may not mean shares will necessarily rev up higher again.
Don’t Expect Sentiment to Soon Swing Back for EV Stocks
As I mentioned above, the prospect of higher interest rates has dampened enthusiasm for growth stocks, including EV plays. As higher interest rates mean a higher discount rate, the present value of growth stocks (valued on future projected results) comes down.
Worse yet, the Fed’s game plan to tackle inflation could wind up being more severe than first assumed. Initially, the thought was the central bank would hike rates three times between now and December. But now, analysts at Goldman Sachs are expecting four rate increases throughout the year.
As the anticipation of tighter monetary policy continues to compel investors to cycle out of growth stocks. This will make it difficult for Nio stock to sustain its current valuation, much less grow it in the months ahead. Yes, if the bull case plays out, and the EV maker resumes knocking it out of the park with delivery numbers?
That may be enough for it to keep falling further from today’s prices (around $29.50 per share). Yet with the changes in the market environment, I wouldn’t hold out much hope that a trip to $50, $60, or even more per share is in the cards for 2022.
The Verdict: A Nio Recovery Will Take Time
Nio has proven skeptics such as myself wrong on many occasions in the past. For instance, it went from the brink of bankruptcy in 2020, to becoming a company that at one time sported a more than $100 billion market capitalization. Although beaten down in the past year, continued success in China, and potential success in Europe and other markets, could someday send it soaring again.
However, the market-related factors that have knocked it down will likely continue to put pressure on it for now. Even if you believe the NIO stock bull case will prevail, keep in mind patience may be necessary, as a (potential) comeback could take time.
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, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.