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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Back view of blue NIO EP9 electric vehicle

Image source: Sam Robson, The Motley Fool UK

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Shot of a young Black woman doing some paperwork in a modern office
Investing Articles

With an 8% dividend yield, I think this undervalued FTSE stock is a no-brainer buy

With an impressive yield and good track record of payments, Mark David Hartley is considering adding this promising FTSE share…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

£9,500 in savings? Here’s how I’d try to turn that into £1,809 a month of passive income

Investing a relatively small amount into high-yielding stocks and reinvesting the dividends paid can generate significant passive income over time.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Dividend star Legal & General’s share price is still marked down, so should I buy more?

Legal & General’s share price looks very undervalued against its peers. But it pays an 8%+ dividend yield, and has…

Read more »

Investing Articles

Dividend shares: 1 FTSE 100 stock to consider buying for chunky shareholder income

This company’s ‘clean’ dividend record looks attractive to me and I’d consider buying some of the shares to hold long…

Read more »

Investing Articles

3 of my top FTSE 250 stocks to consider buying before April

Buying undervalued UK shares can be a great way to generate long-term wealth. Here, Royston Wild reveals a handful on…

Read more »

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »