Should I buy NIO stock under $5?

NIO stock’s currently trading more than 90% below its highs. Is this an amazing buying opportunity or is the electric vehicle play a high-risk proposition?

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Back in early 2021, NIO (NYSE: NIO) stock was trading near $60. Today however, shares in the Chinese electric vehicle (EV) manufacturer can be snapped up for less than $5.

Is it worth buying a few shares in the ‘Tesla of China’ for my portfolio at this low price? Let’s discuss.

Long-term growth story

The long-term growth story here still looks exciting. According to Mordor Intelligence, China’s EV market is set to grow from around US $306bn in 2024 to US $674bn by 2029 (an annualised growth rate of 17.2%).

That kind of double-digit annual market growth should provide a healthy backdrop for EV manufacturers like NIO.

It’s worth noting that NIO’s set to introduce its first ‘mass market’ EV brand in the months ahead. Named ‘Onvo’, this will be an extension to its portfolio aimed at more price-conscious family car buyers, and it could provide an extra growth driver for the company.

Intense competition

However, looking at the company today, I have a few concerns from an investment point of view. One is in relation to the intense level of competition it’s facing.

It’s well known that NIO is facing heavy competition from the likes of Tesla, BYD, XPeng, and SAIC Motor.

But now new competitors are arriving on the scene. Just last month, for example, smartphone manufacturer Xiaomi announced the launch of its new SU7 vehicle.

This EV – which costs less than US $30,000 – received 50,000 orders in just 27 minutes!

Given the level of competition, NIO has been forced to lower its prices. It may also have to lower them further.

No profits in sight

Another issue for me is the company’s lack of profitability. Looking at analysts’ forecasts, NIO is expected to lose a ton of money both this year and next.

In the current economic environment, investors don’t have a lot of time for companies that aren’t generating a profit.

It’s also hard to accurately value a company that doesn’t have any earnings.

Weak Chinese economy

Finally, China’s economy is struggling right now and the market for EV is slowing as a result.

This was illustrated in an update from NIO last month in which it advised it was expecting total deliveries for Q1 to come in at 30,000, down from an earlier forecast of 31,000-33,000 (it ended up posting a figure of 30,053 for Q1).

It’s worth pointing out that for March, the company delivered 11,866 vehicles, an increase of just 14% year on year.

Three years ago, monthly sales were growing at over 300% a year. So growth has certainly slowed recently.

My call

In light of all these concerns, I won’t be buying NIO stock for my portfolio right now. To my mind, there’s too much uncertainty.

Why take the risk on a company facing challenging market conditions and a high level of competition? Especially when there are so many companies with wide economic moats that are doing really well right now.

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.

Edward Sheldon has no position in any of the shares mentioned. 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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