Shares in Chinese electric vehicle (EV) manufacturer NIO (NYSE: NIO) have come down a long way recently. At the start of last year, NIO’s share price was above $60. Today however, it’s near $20.
Here I’m going to discuss whether the recent share price fall has created an attractive entry point. Is it finally time to buy NIO stock for my portfolio?
3 reasons to buy NIO stock today
When I look at the investment case for NIO, I can see why it’s a popular stock. For starters, the Chinese EV market looks set for enormous growth in the years ahead.
According to Mordor Intelligence, the market is set to be worth around $800bn by 2027, up from $124bn in 2021. This growth (around 30% a year) should provide huge tailwinds for NIO.
Secondly, the company is expanding its production at a rapid rate. In the fourth quarter of 2021, for example, NIO delivered 25,034 vehicles, up from 17,353 a year earlier. That represents growth of 44%. If it can keep delivering this kind of growth, its revenues are likely to explode higher over time.
Additionally, NIO has developed some really exciting battery-swap technology. This allows users to quickly change their EV batteries, and ultimately drive further without having to wait to recharge. This technology could be a game-changer.
3 major risks to consider
However, digging deeper, I have some concerns in relation to NIO stock. One is that in the near term, the company is likely to face supply chain and cost challenges which could hamper growth.
This is an issue that has plagued the company over the last year, and I expect the problems to persist in 2022. Chip shortages and rising prices of nickel and lithium (both key battery ingredients) are likely to be major issues for the company, in my view.
If NIO’s production figures are disappointing, the stock could be very volatile, given the company’s high valuation (its market-cap is around $33bn).
Another is that NIO is likely to face intense competition from rivals in the years ahead. These include Chinese EV makers such as Warren-Buffett backed BYD, Xpeng, SAIC Motor, and Western companies such as Ford, Tesla, Porsche, and VW.
It’s worth pointing out here that while some investors like to think of NIO as the ‘Tesla of China’, the reality of the situation is that there are huge differences between NIO and Tesla. In the latter’s early years, it was pretty much the only company producing EVs. In China today however, there’s a vast range of companies producing them.
Finally, there’s the risk the stock could be delisted from the US market. Recently, the US Securities and Exchange Commission (SEC) has threatened to delist a number of Chinese firms due to the fact they haven’t complied with US regulatory requirements. NIO hasn’t been targeted by the SEC yet, but we can’t rule out future regulatory action.
NIO stock: my move now
Weighing everything up, I don’t see NIO’s risk/reward profile as attractive right now. All things considered, I think there are better growth stocks for me to buy.
