Is the NIO share price ripe for a fall?

The NIO share price could suffer a significant decline if the company struggles to take market share from its larger peers, argues this Fool.

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The NIO (NYSE: NIO) share price has become one of the hottest investments to own during the past 12 months. Indeed, during this period, the stock is up around 560%.

It seems to me investors are buying into the company’s growth story. The electric vehicle manufacturer is ramping up production. In April, it said it had completed upgrades to its manufacturing capacity to allow the production of 10,000 vehicles per month.

What’s more, a few weeks ago, it announced a deal with the Chinese state-owned automaker Jianghuai Automobile Group, which manufactures its vehicles, to increase production to around 20,000 cars per month. 

Unfortunately, the output is currently restricted to 7,500 vehicles a month due to a shortage of battery cells and semiconductors. Nevertheless, in April, NIO announced the production of its 100,000th vehicle. 

NIO share price competitors 

Compared to other electric vehicle producers, the corporation is charging ahead. On that basis, the NIO share price looks to be a good investment compared to the rest of the sector. 

But NIO is just one of a range of business is all fighting for market share. As well as its close competitors, such as Tesla, the company is also having to fight off competition from the likes of General Motors. The latter recently announced it’ll be boosting its global spending on electric and autonomous vehicles by 30% over the next few years. This will take the total spend to $35bn.

Meanwhile, Ford’s luxury Lincoln brand aims for half of all sales to be electric vehicles by 2026. 

Over in Europe, towards the end of last year, Volkswagen announced it plans to launch 70 all-electric models by 2030, with 20 of them already in production. Management has earmarked $86bn to hit this target. 

These are just some of the challengers vying for market share in the electric vehicle market. At this stage, it’s impossible to say which company will succeed.

Risk and reward 

There’s space for a range of vehicle manufacturers in the market. Still, to justify the high valuation on the NIO share price, the company will have to take significant market share. It’s unclear whether it’ll be able to do this. 

The company does have some competitive advantages, which should work in its favour. Its battery swapping technology is relatively unique. It also has the support of the Chinese government, which should help the enterprise conquer the Chinese market. 

Still, compared to the likes of Tesla and Volkswagen, the $78bn-cap is in its early stages of development. As such, I think there’s a high likelihood the NIO share price could suffer a fall if competition in the market restricts the company’s growth. With competitors pumping so much money into the market, this seems likely. 

Therefore, I wouldn’t buy the stock for my portfolio today. I’d rather invest in one of the market’s more established companies, such as Tesla.

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 considered so you should consider taking independent financial advice.

Rupert Hargreaves 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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