Is NIO stock about to explode?

High-growth Chinese EV manufacturer NIO is down 28% year-to-date. Dylan Hood takes discusses whether he thinks the stock is about to rise.

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Back view of blue NIO EP9 electric vehicle

Image source: Sam Robson, The Motley Fool UK

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NIO (NYSE: NIO) stock took off towards the end of 2020, finishing the year on 1,400% returns. However, 2021 was a different story, with the Chinese electric vehicle (EV) manufacturer’s shares finishing the year over 35% lower. Currently down 28% year-to-date, are NIO shares about to surge? Let’s take a closer look.

Why NIO stock could rise fast

In my opinion, there are two main reasons why the stock could take off. Firstly, looking at its valuation, it seems very cheap to me. NIO is currently trading on a forward price-earnings (P/E) ratio of 3.8. Comparing this to industry leader Tesla‘s P/E ratio of 8.8, it does beg the question of whether NIO stock is undervalued. My fellow fool Zaven Boyrazian said that assuming NIO could match Tesla’s P/E ratio in the future, it would give the firm an $87bn market cap, which is over double the current value.

Coupling this low valuation with the extremely high growth that NIO has been able to achieve over the past few years gives me confidence in the stock’s ability to ‘explode’. For example, its January delivery data highlighted an impressive 33% increase in year-on-year production, with numbers reaching 9,652. Expanding this timeframe to the whole of 2021, the firm was able to increase its deliveries by 109% compared to 2020. If NIO can keep up these stellar results, I think it will only be a matter of time before the shares start to creep up again.

Headwinds

Although the shares are cheap and growth is high, there are a number of issues the firm must contend with over the coming months. Firstly, it faces huge pressure from Chinese regulatory forces. For example, the so-called ‘Uber of China’, Didi Global, announced that due to pressure from the Chinese government, it would be delisting its shares from US markets. If the same thing happens to NIO, then regardless of its high growth, there will be no US-listed shares to rise as a consequence.

Another risk the stock must contend with is the threat of rising global interest rates. US Inflation data came in at 7.5% year-on-year for January. While the Federal Reserve has not directly raised rates as of yet, a rate rise is expected in March. In the UK, the Bank of England has already begun hiking rates. When they rise, people are less likely to invest in the stock market as they can achieve a higher return on their savings. High-growth stocks such as NIO are usually hit hardest by this phenomenon. This could place a lid on the growth of the stock.

The verdict

While NIO stock possesses high-growth qualities, I think there are too many medium-terms risks facing the stock right now. So I don’t think we’re likely to see the stock explode in the short term. But I do think that if it can overcome the risks of interest rates and a Chinese regulatory crackdown, it could rise in the long term. I’m currently a NIO shareholder but would wait to see how these medium-term risks pan out before considering adding more shares to my portfolio.

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.

Dylan Hood owns shares of NIO Inc. 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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