At around $20 per share today, is Nio (NYSE:NIO) an opportunity, or a trap? In my view, the latter. Many changes over the past twelve months have, and continue to, put pressure on NIO stock. A little over a year ago, shares in this China-based electric vehicle (EV) maker were flying high.
EV stocks were hot. There was little worry about jurisdictional risks out of its home market. Near-zero interest rates made its high valuation seem somewhat reasonable. But since then? This has reversed.
The “EV Bubble” is in deflation mode. Hype around this sector has peaked, with little sign when it will come back. Last year, due to rising U.S.-China tensions, and China’s crackdown on its own U.S.-listed companies, delisting fears emerged. These fears may no longer be top of mind, yet they haven’t gone away.
If that’s not bad enough, there’s the rate hike factor, and its negative impact on shares. As rates rise, it has become more difficult for growth stocks, even those with very high levels of projected growth, to maintain high valuations. Stocks like this one have seen high levels of multiple compression.
As all these issues remain, I wouldn’t be confident in a recovery anytime soon. In fact, these factors, alongside the possibility its operating results underwhelm in the quarters ahead, may mean shares continue to decline in price.
NIO Stock and Upcoming Earnings
With its 39.3% drop over the past six months, and 27.2% drop year-to-date alone, some may believe the worst is over for Nio. Especially as its next earnings release approaches. Solid results, and positive updates with its global expansion plans could help renew interest in the hard-hit EV maker’s shares.
However, based on its recent delivery numbers, it may be a stretch to say the company knocks it out of the park with its fourth quarter numbers. Like I discussed in my last article on NIO stock, year-over-year delivery growth has been slowing down over the past few months. On a month-over-month sequential basis, delivery numbers have been moving lower. This suggests that, at best, Nio will report quarterly revenue in-line with analyst estimates, which range between $1.5 billion and $1.59 billion.
As a Seeking Alpha commentator recently noted, this means flat sequential revenue growth. In turn, upcoming numbers could have little positive impact on the price of shares. Or worse, cause a drop for shares, if results from its initial overseas expansion (into Norway) fall short of expectations. This could mean many more challenges ahead for its global expansion plans.
In short, another big pullback post-earnings could be more likely than a post-earnings rally.
Many Issues Could Continue to Weigh on Shares
Again, many factors have helped to push NIO’s stock price down by more than a half since early 2021. Yet, don’t assume the market has fully gotten over them. Let’s take a look at the three main factors at play here.
First, the decline of “EV Mania” could continue. The market instead is taking a more “show me” approach with names in this space. In other words, less pricing-in of future growth as heavily as was seen during 2020 and 2021. With this, publicly-traded names in the space could see their respective valuations continue to come down.
Second, the delisting risk is not yet off the table. This issue isn’t as top of mind as it was during mid-2021. But it’s something with a fairly high chance of happening. Given that Sino-American tensions are on the rise, and the U.S. Securities and Exchange Commission (SEC) is pursuing more stringent audit rules for U.S.-listed foreign companies? Ultimately, it may have to give up being traded on the New York Stock Exchange. A delisting, which may mean a move to the over-the-counter (OTC) market would have a negative effect on its stock price.
Third, the rate hike issue may persist. One economist, JP Morgan’s (NYSE:JPM) Bruce Kasman, is projecting nine consecutive rate increases from the Federal Reserve through 2023. So interest rates may be going up more rapidly than previously believed. This will result in additional multiple compression for NIO stock.
Therefore, expect all three issues to push shares lower in the months ahead.
The Bottom Line
It’s not just these overarching issues that could continue to push Nio to lower prices. If it keeps on releasing underwhelming delivery numbers? This could have a negative impact on shares as well.
Bullish investors are banking on the automaker’s production expansion paying off for it later this year. Even so, ramping up output is just one side of the equation. Considering its recent delivery growth challenges? I’m skeptical it will find enough demand to match up with its planned big increase in supply.
Unless conditions change, the best move remains to steer clear of NIO stock. It may be a while before it bottoms out.
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.