Shares in Chinese electric vehicle (EV) manufacturer NIO (NYSE: NIO) have experienced quite a pullback recently. Back in November, the stock was trading above $40. Today however, NIO’s share price is under $20.
However, many investors continue to be bullish on NIO. Some have even called the company the ‘Tesla of China’. Is this a buying opportunity for me? Let’s discuss.
Two reasons to be bullish on NIO stock
I can see why many investors remain bullish here. For starters, the Chinese EV market is expected to experience enormous growth over the next decade.
According to Research and Markets, the industry is set to grow by around 30% a year over the next five years (and worth around $800bn by 2027). This kind of market growth should create powerful tailwinds for NIO and other Chinese EV manufacturers.
Meanwhile, NIO has some unique battery technology in the form of its ‘Power Swap’ stations. These allow NIO drivers to exchange batteries in a matter of minutes. Last month, NIO’s 1,000th Power Swap station was put into service in Tibet, China and, so far, the company has completed over 10m battery swaps. This feature may help to eliminate the ‘range anxiety’ that a lot of prospective EV buyers have.
NIO isn’t without risk
However, digging deeper, there are few things that concern me in relation to NIO stock. One is the state of the Chinese economy. Right now, China is experiencing a significant slowdown.
As a result, consumer demand for luxury goods is weakening. NIO makes premium vehicles that cost quite a lot ($70k+ USD in many cases). So it wouldn’t surprise me if consumers were to gravitate towards cheaper vehicles made by rivals.
Speaking of rivals, there are a lot of them. BYD, Xpeng, SAIC Motor, Tesla, Volkswagen, and Ford are just some of the companies making EVs in China today. NIO is going to have its work cut out competing with all these. It’s worth noting that of the top 20 EVs sold in China in May, none were NIO vehicles.
The lack of profits here is another issue. This year, NIO is expected to post a net loss of about CNY 6.8bn. Now this isn’t a total deal breaker for me. Tesla was unprofitable for years and still turned out to be a winning investment for long-term investors. However, a lack of profits does add risk.
Finally, I’m concerned that NIO was recently targeted by short seller Grizzly Research, who claimed the EV manufacturer is exaggerating its revenues and profitability. NIO has denied the allegations. However, I think the short report is worth keeping in mind, as short sellers tend to do their research.
NIO stock: should I buy?
It’s worth noting that NIO stock doesn’t look particularly expensive right now. At present, the forward-looking price-to-sales ratio is under four. So perhaps a lot of the risks I’ve mentioned are priced into the stock already.
However, given the risks, I’m happy to leave NIO on my watchlist for now. All things considered, I think there are better growth stocks to buy right now.
