Why NIO’s share price has fallen

NIO’s share price has fallen significantly since 10 February. Here, Edward Sheldon looks at what’s going on with the Chinese EV maker.

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Shares in Chinese electric vehicle (EV) manufacturer NIO (NYSE: NIO) have underperformed over the last few weeks. Back on 10 February, NIO shares were changing hands for just under $65. Yesterday, however, the stock fell as low as $41.70. That represents a fall of about 36% in just eight trading sessions.

So, why has NIO’s share price experienced such a dramatic collapse? Let’s take a look at what’s going on.

Why has NIO’s share price crashed?

One reason NIO’s share price has declined recently is that growth stocks, as a whole, have pulled back on rising inflation worries.

Many investors are concerned that inflation is set to rise in the months ahead and this resulted in a sharp rise in long-term bond yields. Over the last month, for example, the 10-year US Treasury Note yield has jumped from about 1.04% to 1.35%. Higher long-term yields lower the present value of future company earnings, reducing the appeal of owning high-growth stocks.

NIO certainly isn’t the only growth stock to decline. Many other popular growth stocks across sectors such as technology, renewable energy, and cannabis have also experienced double-digit declines over the last few weeks.

Electric vehicle stock bubble

The electric vehicle sector seems to have been hit particularly hard in the sell-off. This is not so surprising as valuations in the sector were very high. Recently, I noted that NIO was valued at more than $2 million per car sold last year. Some analysts have been concerned that the sector is in a bubble.

It’s worth noting that rival Tesla has also experienced a sharp pullback. Its share price has dipped from around $880 to around $699 since late January. That represents a decline of more than 20%.

Similarly, SPAC Churchill Capital Corp IV – which recently merged with EV maker Lucid Motors – has also experienced a sharp pullback. Yesterday, its share price fell nearly 40%.

Looking at these share price declines, it appears that some of the heat is coming out of the EV sector.

NIO shares are up 1,000%+ in a year

Finally, it’s worth noting that NIO stock has had an incredible run over the last year. Even after the recent share price fall, it’s still up more than 1,000% over the last 12 months.

After that kind of share price rise, it’s quite normal to see a bit of profit-taking. I imagine that with the shares now pulling back a little, plenty of investors are taking some profits off the table to lock in their gains.

Some investors are probably also moving money into beaten-up stocks that could benefit from the reopening of the global economy.

Growth stock sell-off 

In conclusion, NIO’s recent share price fall doesn’t seem to be anything to do with the company itself. There have been no worrying announcements since the company posted its January 2021 delivery update on 1 February. It seems the stock has simply been caught up in the growth stock sell-off/switch into ‘reopening’ stocks.

NIO investors can expect to learn more about the company’s recent progress when it reports its fourth-quarter and full-year 2020 earnings after the US markets close on Monday.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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