Two Factors Create Hurdles for a Nio Stock Comeback

After dropping to just over $20 per share on Jan 28, it may have seemed like Nio (NYSE:NIO) stock had found a floor. After all, it surged by around 17.3% the following day. Although its January delivery numbers weren’t as spectacular as seen in prior months, growth is growth, right?

A close-up shot of the Nio (NIO) ES8 vehicle.
Source: xiaorui / Shutterstock.com

Not so fast. A year ago market trends may have been working in its favor. Coupled with strong operating results, it’s no surprise this China-based electric vehicle (EV) maker went on an incredible run to prices above $60 per share. But in the twelve months since, these two factors that were working in its favor dissipated.

Today? There are still two factors at play that will drive Nio’s performance in the months ahead. Only this time, they are working out of its favor. First, slowing sales growth. Some may not see this as much of an issue. Second, multiple compression for richly-priced growth stocks may not be over. Even if this doesn’t result in shares taking another dive, it may prevent them from heading back to higher prices.

Investors bullish on the stock may have a counter for each issue. However, taking a closer view, it’s still hard to be confident that their bull case will prevail, and this former high-flier will re-hit past highs, and hit new ones, anytime soon. With this, continuing to hold off on shares is your best move.

NIO Stock and Slowing Sales Growth

On Feb 1, Nio’s January 2022 delivery numbers hit the wires. Delivering 9,652 vehicles during the month, this was a 34% year-over-year (YoY) increase. However, take a look at its December numbers, and you’ll see this was a month-over-month, or sequential, sales decline.

Not only did the company sell more vehicles (10,489) in December than in January. On a YoY basis, December saw a much higher rate of sales growth (49.7%). Go back to November, and the EV maker again sold more vehicles (10,878), and saw a much higher YoY rate of growth (105.6%).

Again, investors still bullish on NIO stock have a counter to this argument. Namely, that increased production capacity later this year means high delivery growth ahead. But while I admit that maxing out its capabilities may help explain the YoY deceleration, it doesn’t explain the sequential drop in raw deliveries.

I could be proven wrong in time. Yet for now, I’m sticking to the view that demand for this company’s EVs in China is not as robust as the stock’s biggest boosters suggest. At the very least, until this new production capacity comes online, Nio could continue to deliver underwhelming sales numbers. This will limit its ability to bounce back.

Why This EV Maker Could Stall as it Grows into its Valuation

Following its 57% decline since February 2021, I’ll concede the NIO stock valuation is not as frothy as it once was. On a price-to-sales (P/S) basis, this EV maker’s valuation (6.9x) may appear reasonable. For instance, Tesla (NASDAQ:TSLA) trades for 11.6x sales. That’s also a lower sales multiple than another Chinese EV play that has a U.S. market listing, XPeng (NYSE:XPEV), which trades for 9.4x sales.

Even so, relatively cheap, don’t assume that Nio has the ability to experience multiple expansion in the near-term. As the Federal Reserve continues in its shift from dovish to hawkish fiscal policy, this stock’s valuation could compress further. Especially if in the end, the bulls are incorrect, and increased capacity does not result in a re-accelerated sales growth.

But even if it does help top-line growth speed back up, higher interest rates could still stymie the stock’s rebound plans. Instead, rising rates, against re-accelerated rates of revenue growth, could simply mean NIO stock stalls out. That is, holds steady between $20 and $30 per share, until it grows into its valuation.

If your time horizon with Nio spans years, or even more than decade, this may not matter. If the company ultimately proves to be China’s answer to Tesla, producing a high-six figure, or even seven-figure, number of EVs per year, it may have the ability to get to prices above its past high water mark. However, if you’re buying this in the hopes of a rapid recovery from $25 back up to above $60 per share? You may be disappointed.

The Verdict: No Need to Buy at Today’s Prices

At under $25 per share, Nio may look like a bargain. Yet the prospects of it making a big comeback within the next year are questionable. Until it proves otherwise, based on its delivery numbers it seems like sales growth has come to a screeching halt. It’s not for certain that it’ll see more multiple compression if rates rise. But rate hikes could still affect its ability to bounce back, even if growth speeds back up.

Until slowing growth and rising rates are no longer an issue, hold off on 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.


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