At $46, is it the right time for me to buy NIO stock?

NIO stock has faced a difficult few months. But investors have recently been more bullish, with the stock rising to $46. Should I buy?

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The last few months have been turbulent for NIO (NYSE: NIO) stock. After hitting highs of over $60 in February, it was priced at $30 at the start of May. This 50% fall was partially caused by a general downturn in the markets, specifically targeting growth stocks.  There was also a semiconductor shortage that weakened production, and this was a problem for many electric vehicle (EV) companies. Nonetheless, the stock has been able to recover many of these losses and is currently priced at $46. Most recently, NIO stock rose on the news that it was constructing a second plant. As such, should I now buy?

Reasons to invest

There’s no doubt that Nio stock has plenty of growth potential. Indeed, the company has consistently increased production of its vehicles, and this has been enabled by strong demand. For example, in May, despite the semiconductor shortage, it delivered 6,711 vehicles, an increase of 95% from the year before.

Production is also likely to continue increasing, especially with the news that the EV company is constructing a second factory. This new factory is expected to begin production in the third quarter of 2022 and should double NIO’s production capacity to around 20,000 vehicles per month. Hopefully, this will enable it to capitalise on rising demand for EVs. It may also help it get closer to being profitable in the near future. This would likely have a very positive impact on the stock.  

Finally, I feel that NIO can differentiate itself from other EV companies. Not only does it already have a fairly large existing product line, which includes both sports cars and full-size SUVs, but it also has a number of unique innovations, such as battery swapping. This allows customers to quickly change their depleted battery at a nearby service station. As this is not used by many other EV companies, including Tesla, it is clearly key to NIO’s competitiveness It also helps differentiate it from others. Accordingly, despite the increased competition in the EV market, I feel that NIO is in a very strong position.

The risks

There are still multiple risks that I must take into account before investing in NIO stock. Firstly, the global semiconductor shortage could continue to challenge the company, especially if it’s unable to reach its production targets. This may hinder the company’s growth.

Furthermore, I do have some worries about the valuation of the business. It has a current market-cap of around $58bn, despite generating revenues in 2020 of only $16bn. This can be compared to a more traditional carmaker such as BMW, which has a slightly higher market-cap of $80bn, but far higher 2020 revenues of around $125bn. As such, NIO stock is highly valued on its growth potential and is, in many ways, therefore rather speculative. Any disappointment would likely be met with large losses.

Am I buying NIO stock?

I’m very tempted by NIO stock due to its strong growth potential. This potential has increased recently due to the construction of a second factory and news of international expansion into Norway. Nonetheless, I’m currently not buying due to concerns over the company’s high valuation. This makes NIO stock too much of a risk for me.

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.

Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. and 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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