Shares in Chinese electric vehicle manufacturer NIO (NYSE: NIO) have delivered disappointing returns recently. Since 11 January, when NIO’s share price hit an all-time high of $67, the stock has fallen to $42. This near-40% share price fall needs to be put in perspective however. Over a year, NIO stock is still up more than 600%.
Is NIO a buy for me at $42? Let’s take a look at the investment case for the electric vehicle maker.
NIO: 95% growth in May
NIO’s latest trading update, posted on 1 June, showed the company continues to grow. In May, NIO delivered 6,711 vehicles for the month, an increase of 95% year-on-year.
While this is an impressive level of growth, it’s worth noting that year-on-year delivery growth in April and March was 125% and 373% respectively. So growth has slowed somewhat.
NIO said vehicle delivery was adversely impacted for several days due to the ongoing global semiconductor shortage and “certain logistical adjustments.” It also said it plans to accelerate delivery in June to make up for the delays in May.
For the second quarter of 2021, it expects to deliver between 21,000-22,000 vehicles. In Q2 2020, it delivered 10,331 vehicles.
Long-term growth potential
Looking further out, I think NIO has substantial room for growth. According to S&P Global Platts, electric vehicle sales in China – the largest EV market in the world – could hit six million units by 2025, up from 1.3m units last year. This strong industry growth should benefit NIO.
NIO stock: the risks
I still have some concerns in relation to NIO stock however. My main one relates to the valuation. At its current share price of $42, NIO has a market-cap of around $52bn. That seems high for a company that, to date, has only delivered a total of around 110,000 vehicles. To put that valuation in perspective, Ford, which sold 4.2m vehicles last year, currently has a market-cap of around $63bn.
I also have concerns in relation to the competition NIO is going to face in the years ahead. Not only does it face competition from Chinese EV makers such as SAIC Motor, Xpeng Motors, and Warren Buffett-backed BYD, but there’s also Western automaker rivals such as Volkswagen, Ford, and Porsche to contend with. Volkswagen has said it’s targeting a 50% market share in China by 2030.
Finally, the global chip shortage could continue to cause challenges for NIO. Some analysts are now saying the shortfall could last until 2023. This could impact NIO’s growth plans and targets.
NIO: my move now
Weighing everything up, I’m not convinced NIO stock offers an attractive risk/reward proposition right now. While the company is growing rapidly, its valuation is high and there are a number of challenges it needs to overcome.
All things considered, I think there are better growth stocks I could buy for my portfolio today.
Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. 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.