The electric vehicle (EV) market faces a real test in 2022 due to ongoing subsidy cuts by the Chinese government. Nio’s (NYSE:NIO) deliveries in January and February have slowed considerably as a result. In the near term, that can’t be good for NIO stock.
Longer-term, the company can get past this softness in the market, but shareholders are just going to have to be patient. Unfortunately, Nio can’t resolve the issue overnight.
Now could be the perfect time to put its shares on your watchlist for those who don’t own NIO stock.
Here’s why.
NIO Stock Down 44% YTD
Out of the 11 S&P 500 sectors, only energy is in positive territory through March 4, up 34.8%. The index itself is down 9.2%. Consumer discretionary stocks — Nio is one — are down 16.2%. It’s bad across virtually the entire market. And it could get worse thanks to a Russian madman.
As for Nio’s peers, they’re also in trouble three months into 2022.
Nio and Peers — Performance YTD through March 4
| Company | YTD Return |
| Nio | -44.3% |
| Tesla (NASDAQ:TSLA) | -30.1% |
| Xpeng (NYSE:XPEV) | -41.3% |
| Lucid Group (NASDAQ:LCID) | -44.7% |
| Li Auto (NASDAQ:LI) | -15.8% |
| BYD Company (OTCMKTS:BYDDY) | -23.1% |
I could add a bunch more, but I think you get the picture. It’s not been easy to hold EV stocks in 2022. The First Trust Nasdaq Clean Energy ETF (NASDAQ:QCLN), which has Tesla, Nio, and Xpeng in its top 10, is down 20.0% YTD.
Nio is currently trading within pennies of its 52-week low of $18.47. It hasn’t traded this low since September 2020. So it’s bad out there.
It’s Always Darkest Before the Dawn
Nio reported February deliveries of 6,131, 36.5% lower than its deliveries in January, 8% lower than its December deliveries of 10,489. Nevertheless, the company’s February deliveries rose 9.9% over February 2021. However, a 9.9% increase seems feeble next to a 49.7% YOY increase in December.
Some blame for the slowdown goes to the annual Spring Holiday Festival that ran from Jan. 31 to Feb. 6. However, the real problem is the subsidy cuts by the Chinese government for electric vehicles.
The Chinese government started the cuts in 2010. They’ve been a boon for Nio and its other domestic competitors. In 2020, the subsidies were cut by 10%, in 2021, they were cut by 20%, and in 2022 they were cut by 30%. Then, in 2023 and beyond, they’ll disappear completely.
That explains why December’s delivery numbers were so strong. Overall, 518,000 new energy vehicles (NEVs) were sold in China in December, 159.5% higher than a year earlier. But even in January, the country generated NEV sales of 431,000, 135.8% higher than January 2021.
Over the course of the 12-year program, the Chinese government provided EV subsidies of 140 billion Chinese Yuan ($22.2 billion). However, it believes the EV market is strong enough to let consumer demand dictate sales, not subsidies.
Nio shareholders ought not to be too concerned. The current war between Russia and Ukraine has seen gas prices rise to record highs. That’s going to remind car buyers once more why EVs make sense over the long haul.
Close to where I lived in Southern Ontario, a recent CTV article discussed Canadians switching to electric.
“It used to be more of a fringe thing before,” CTV reported Kia Waterloo General Manager Chris Goldswortchy said. “We would sell the odd electric vehicle, but it had to be a specific customer that didn’t have a huge range requirement and was doing most of their driving in town. But now the technology has come a long way and the cars more usable for your average user. And gas prices are enormous, so the demand is huge compared to what it was before.”
As long as inflation remains stubbornly high, more consumers will think seriously about converting to an EV.
The Bottom Line
At the beginning of February, I said that Nio was a slam-dunk buy under $20. Now that it is trading under $20, my opinion hasn’t changed. Nio and its peers are going through a rough patch. Ultimately, however, the company is ideally positioned to expand its global network from China and Norway in the coming years.
If you can handle volatility, buying under $20 will look like an excellent decision in five years. As always, however, do not bet anything you can’t afford to lose. There are no guarantees in equity investing, just as in life.
Nio is an excellent long-term buy.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
