- On paper, Nio (NIO) should be a no-brainer due to higher fuel costs.
- However, the lack of skyrocketing inflation in China reflects demand issues.
- NIO stock might be a bull trap.
From a cursory perspective, electric vehicle (EV) manufacturer Nio (NYSE:NIO) appears very attractive. With inflationary pressures impacting consumers throughout much of the world, drivers of combustion-powered cars are feeling the heat. Therefore, all the circumstances driving the fossil-fuel price spike represent an organic marketing opportunity for NIO stock.
True, shares of the EV maker haven’t exactly been cooperating with the bullish narrative. On a year-to-date basis, NIO stock is down more than 36%. But over the past 10 days, NIO is up nearly 13%. Presumably, the pain at the pump could drive the security even higher.
Still, no investment presents a perfectly clean prospectus. Recently, Nio reported its earnings results for the fourth quarter, and while it beat on the top line, it missed on revenue guidance. This disclosure indicates that not everything is going to plan with NIO stock.
So, which side of the narrative should investors take?
| NIO | Nio | $21.20 |
Fossil Fuel Prices Make NIO Stock Attractive
Recently, I had a conversation with a friend who purchased an EV. As you might expect, he jokingly patted himself on the back for having the smarts to go electric. While he didn’t go with Nio — a Tesla (NASDAQ:TSLA) Model 3, to be exact — the point stands. At this juncture of high energy prices, it’s a fortuitous benefit to be an EV owner.
Well before the dangerous decision Russia made to invade neighboring Ukraine, gasoline prices were rising. However, they’ve accelerated across much of the world since the invasion began. It’s true some countries, like the U.S. are not dependent on Russian oil. However, Russia does provide a significant source of global supply.
With that oil gone (at least for the time being), soaring demand and diminished supply can only mean one thing: it’s a good time to be in NIO stock or other EV investments.
While I don’t want to be cynical — nor do I want to speculate — you also can’t help but wonder if ridiculous petrol prices could be part of the new new normal. The conflict could continue, and NIO stock could be much more interesting than it would have been prior to the geopolitical flashpoint.
Economic Recovery May Have Stalled in China
Given the powerful catalysts that could keep petrol prices at extremely elevated levels, what’s wrong with piling into NIO stock? Well, Russia could lose the war it started in Ukraine, for one.
But even if you take away the geopolitical element altogether, you still have the Chinese economy to consider. On paper, it has the amazing luxury of being able to ponder benchmark interest rate cuts as opposed to rate hikes like in the west. But this might be a double-edged sword.
As Zhiwei Zhang, Chief Economist at Pinpoint Asset Management, stated, “Lower inflation reflects the weak domestic demand.” Further, Zhang added that “Macro policies have turned more supportive but it takes time for the impact to be transmitted to the economy.”
If indeed this assessment is accurate, I think it points to potential risk factors for NIO stock. While the EV industry has advanced considerably, this segment is still a luxury. Thus, weak domestic demand would be most unhelpful for Nio.
Keep the Powder Keg Dry With NIO Stock
Another factor to consider is that in the countries where Nio has expansionary strategies, inflation is a serious concern. Therefore, even if lower inflation in China wasn’t due to disappointing demand, Nio would face opposite circumstances abroad. So, it’s not immune to the inflation threat.
Given such concerns, I would be cautious about NIO stock. Yes, the discount is tempting — I will grant anyone that. However, I also believe there’s wisdom in keeping the powder keg dry.
On the date of publication, Josh Enomoto 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.
