NIO (NYSE: NIO) stock surged throughout 2020, generating an astronomical 1,400% return for the year. However, 2021 seemed to stall this momentum, with the stock sinking 35%. 2022 has been a similar story, with the shares down over 50% year-to-date (and down 61% over 12 months).
However, after falling as low as $12, the shares seem to have regained some momentum, climbing almost 5% in the last five days. So, is now the right time for me to add it to my portfolio? Let’s investigate.
Why NIO stock has fallen
As mentioned, NIO has had a pretty tough ride so far in 2022. I think the main reason for this is the threat of rising inflation and higher interest rates across the globe. Inflation is bad for firms like NIO, as it pushes up costs and erodes the value of future earnings. In addition to this, when it rises, central banks usually hike rates to control costs. This has been the case globally with both the US and UK raising rates in the past few months. As this happens, investors pull their money out of risky, pre-profit companies like NIO and seek safer investments.
More specifically to NIO, the pandemic caused serious disruption. The recent Shanghai lockdown forced NIO to suspend production of vehicles in April. I expect this disruption to significantly impact revenues. In addition to this, NIO has been facing concerns over the possible delisting of its stock in the US. If this were to come to happen, then the firm would be cut off from a major source of capital, as well as a strong investor base. To mitigate this risk, it has listed secondary shares on both Honk Kong and Singapore’s exchanges. However, it seems the delisting speculation has been enough to drive the share price down.
Future upside
NIO stock isn’t out of the woods yet, but I think there are reasons to be excited.
In its 2021 Q4 results the firm announced a 118% increase in vehicle sales. In addition to this, margins rose to 20% from 12% in 2020. As a consequence, gross profits rose 264% year on year, reaching just over $1bn. I find these figures extremely hard to ignore when considering the investment case for NIO.
In my opinion, NIO looks cheap too. It currently trades on a modest 4.8 price-to-sales (P/S) ratio. For context, market leader Tesla trades on a much higher 12.1 P/S ratio. Close competitor Xpeng trades on a 6.2 P/S ratio, so at the current low price, NIO could be undervalued.
The verdict
Overall, I like the current price of NIO as an entry point for a position. Although it may dip further in the coming months, I think the stock could offer some significant upside in the long term, especially considering its cheap-looking P/S ratio. In addition to this, the company’s growth has been outstanding. Therefore, I would be happy to buy NIO at $16 for my portfolio.
