Down nearly 5% in early afternoon trading, investors in Chinese electric vehicle (EV) company Nio (NYSE:NIO) are clearly in selling mode. Today’s move in NIO stock has outpaced most U.S.-based EV rivals, providing a head-scratching move to say the least.
That’s because this movement doesn’t really come alongside significant headlines in the space. However, other Chinese EV makers XPeng (NYSE:XPEV) and BYD (OTCMKTS:BYDDY) are seeing similar declines, suggesting the move is more geopolitical than sector-specific.
Today, analysts from Bernstein put forward a note suggesting that Tesla (NASDAQ:TSLA) may be poised to continue cutting prices this year. The company has already put forward several price cuts, but it may be enticed to do more. That’s because analysts believe demand is evaporating, particularly on the higher-end portion of the market.
For Nio, which competes in the medium- to high-priced EV segment, this isn’t good news. Let’s dive into why NIO stock is feeling the pain more than Tesla right now.
NIO Stock Drops on Expectations of Continued EV Price War
A price war isn’t good for any specific industry. When leaders in a given sector cut prices, that hurts margins across the board. Accordingly, for companies with less production capacity or an inability to lower their costs relative to peers, this can lead to balance sheet strain. Investors appear to be pricing in such a situation for Nio and its Chinese EV peers today.
In many respects, the Chinese market is important for Tesla, which has cut its prices there multiple times over the past year. These price cuts could boost Tesla’s market share, but at a cost for the sector. Additionally, such price cuts don’t point to robust demand for higher-priced vehicles — something that has been baked into valuation models for EV stocks for some time.
Given Nio’s valuation multiple as well as its reliance on strong demand for mid-to-high-end EVs, this confluence of factors appears to be driving investors to TSLA over others right now.
For those bullish on NIO stock and the company’s ability to weather the storm, perhaps the current share price decline is an opportunity. Indeed, if Nio can post significant revenue growth while maintaining prices, the company’s brand power (at least in China) could propel it to better fundamentals.
We’ll have to see. For now, though, the market is clearly taking a cautious approach to this sector, with most EV stocks down on the day.
On the date of publication, Chris MacDonald did not hold (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.