Is NIO stock the best way to profit from electric vehicle growth?

Jon Smith explains why he’s bullish on NIO stock due to strong growth figures, despite the inevitable risk from political tensions.

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Blue NIO sports car in Oslo showroom

Image source: Sam Robson, The Motley Fool UK

The electric vehicle market has become very popular over the past year. Personally, I can feel the growing consensus of people that are open to owning an electric car. Interestingly, in December, more electric cars were sold than diesel cars in Europe. It was the first time this has happened. One popular electric vehicle manufacturer is NIO (NYSE:NIO). So should I buy the stock to capitalize on this growing market?

Good value, but risks around China

NIO and Tesla are the two original electric vehicle manufacturers. Tesla traditionally has owned the US market, with NIO larger in Asia due to its Chinese origins. Both companies are present in Europe. The reason why I’m staying away from Tesla for the moment is because I think the stock is overvalued. I wrote about this in more detail here.

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Parking Tesla to one side, what value does NIO stock have? To begin with, the share price is down 45% over the past year. So the conversation here isn’t about whether the share price is overvalued!

The main reasons why NIO stock has fallen over the past year is to do with the rising tensions between the US and China. The US listing of NIO has come under scrutiny as part of a broader crackdown by Chinese regulators. We’ve seen examples of companies actually delisting from the US, such as Didi. Given the power that the Chinese government has, I think a lot of investors are cautious about buying NIO stock due to potential complications further down the line.

Fundamental positives for NIO stock

Movements in NIO stock going forward shouldn’t just be based around political concerns. In the long run, the share price should also reflect the growth of the electric market. To some extent this has already been seen. For example, over a two-year period, NIO stock has gone from just under $5 to over $30 now. The fundamental value can been shown here.

In the latest results, NIO proved that it’s performing well. The Q3 figures highlighted that 24,439 vehicles were delivered. This was an increase of 100.2% versus the same quarter last year. It was also a gain of 11.6% from Q2 2021. 

In a similar way, revenue also jumped by 116.6% year-on-year, with a 16.1% increase from previous quarter. Although the company ultimately delivered a loss for the three months, the growth should enable a breakeven point to come soon.

My overall thoughts

From my point of view, I think NIO stock is one of the best ways to profit from the growth in electric vehicles in years to come. I think that the political tensions have caused the share price to fall to levels that don’t accurately reflect the growth of the business. Of course, it’s a high risk play given the presence of the Chinese government. But when I compare the stock to something like Tesla, I think there’s a much better risk versus return on NIO stock. Therefore I’m considering buying shares now.

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Jon Smith has no position in any share mentioned. The Motley Fool UK 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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