The EV sector was one of the last sectors to ride the good times before the market switched gears. Many of these names, including China-based Nio (NYSE:NIO) stock, were trading at wildly inflated valuations.
I have mentioned more than once that it’s completely absurd that any car company that has yet to roll a million or more cars off its assembly line in a year should be valued more than companies that do so on a regular basis.
Granted, Tesla CEO Elon Musk is a showman, and certainly built a cult following for his car and his businesses. But remember, about four years ago, Musk was worth about $12 billion, and TSLA was worth around $60 billion.
Now there’s significantly more competition, the big automakers are getting involved, regional players are ramping up, yet the TSLA myth continues unabated.
Where Nio Stock Fits In
Now that the heady EV days are over, investors should start thinking more rationally about this sector.
Right now, we’re about where the tech bubble popped in 2000. That didn’t end digital innovation and growth, it just stopped being about stocks with massive market caps and no earnings.
The companies that survived sobered up and put together real plans and slowed their massive spending and unrelenting expansion. They stuck to profitability and scalable success.
That’s where Nio sits now. As a China-only player at this point, it certainly has a massive domestic market. And it has the blessing of the Chinese government, which is always helpful.
And given the fact that the U.S. and China seem to but heads more than cooperate these days, “Made in China” will take on an increasingly significant status.
China to this point has grown out of its insular communist era into a global economic powerhouse largely due to its export manufacturing sector. But the next pivot is to become a self-sustaining economic force.
Its domestic market is so large and now, its middle class is now larger than the entire population of the U.S. And the U.S. middle class is shrinking. These are the long-term trends that you need to think about when you’re investing in next-gen vehicles.
The Next EV Wave Will Be About Price Points
Early adopters are generally higher income people that don’t mind paying a premium to be one of the first people to own a new technology.
This has been a tried and true way to enter the EV market, Nio stock included. Offer a high-end, super-performance machine that has limited production and then offer a luxe model sedan or SUV. After that, given initial success, you can start to scale up production and lower the price points.
At this point, Nio stock has three premium models on sale starting at around $50,000, without government incentives. That’s a good spot to build out production.
However, China has been having Covid lockdowns of major cities that have shut production for Nio and other EV makers, TSLA included.
This has hurt the broad automotive industry, since many EVs rely on batteries and other parts and equipment that’s built in China. But Chinese EV makers don’t have the massive supply chain issues, since their production distribution is China-centered.
All this means Nio has growing advantages in a more dynamic market. And since TSLA and other non-Chinese carmakers end up selling more expensive cars due to tariffs, import duties, etc., this is a great opportunity to expand into the middle class market.
Nio stock has lost 36% year to date. But that still doesn’t make it a bargain. It’s also up almost 34% in the past month. This isn’t the bottom, however. Although we’re getting close to it. The second half of the year will determine how quickly the global economy recovers.
But if you’re interested in an EV stock that stirs more thought than passion, and you have a long time frame, this would be a good time to slowly start buying Nio stock again.
On the date of publication, GS Early 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.