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Should I buy NIO stock near $40?

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After delivering huge gains in 2020, NIO (NYSE: NIO) shares have underperformed this year. Year to date, NIO’s share price has fallen from $49 to $41, which is disappointing considering that the stock market, as a whole, has moved higher.

Has this share price weakness created an attractive buying opportunity for me? Let’s take a look at the case for buying NIO stock right now.

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NIO: strong growth in Q2

NIO’s second-quarter 2021 results, posted last week, showed that the company continues to grow at a rapid pace.

For the quarter, NIO registered total vehicle deliveries of 21,896, an increase of 112% from the second quarter of 2020 and an increase of 9% from the first quarter of 2021.

Total revenue for the quarter amounted to RMB8,448m (US$1,308.4m), representing an increase of 127% from the second quarter of 2020 and an increase of 6% from the first quarter of 2021.

Meanwhile, the net loss came in at RMB587.2m ($90m), representing an improvement of 50% on Q2 2020.

Given that the company is still dealing with semiconductor/supply chain issues, I think the Q2 results were quite good.

Taking on Tesla

Looking ahead, I think there’s plenty of potential for further growth in the long run.

Next year, NIO is planning to roll out three new models including a premium sedan (the ET7) and a cheaper model. Its aim is to widen its customer base and take on rival Tesla.

Basically, our thinking is that we would like to launch a product that can have competitive pricing compared with Tesla’s products but can provide much better products and services,” said NIO CEO William Li on a call with analysts.

This is all very encouraging.

3 risks to consider

I do have a few concerns about NIO stock, however.

One is in relation to competition. In the years ahead, NIO is likely to face intense competition from other auto companies including Tesla, Volkswagen, Porsche, Ford, SAIC Motor, Xpeng Motors, and BYD. This level of competition could impact the company’s growth and profits.

Another concern is in relation to regulatory risk. Recently, Chinese regulators have been cracking down on Chinese companies that are listed in the US. NIO has not been targeted by regulators yet but we can’t rule out the possibility of a future crackdown on the company.

Finally, there’s the valuation. Even after the recent share price pullback, it still looks quite high to me. Currently, NIO has a market cap of $62bn and a forward-looking price-to-sales ratio of around 12. By contrast, Volkswagen, which delivered 2.5m cars in Q2 and is likely to be one of the big players in the electric vehicle space in the future, has a market cap of around $133bn and a price-to-sales ratio of about 0.5. NIO’s high valuation adds risk, in my opinion.

Should I buy NIO stock now?

Weighing everything up, I’m going to leave NIO stock on my watchlist for now.

At the moment, I think there are better growth stocks I could buy.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc., Tesla, and Volkswagen AG. 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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