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Tesla and NIO have fallen 30%+: should I buy these stocks now?

Image source: Tesla

Tesla (NASDAQ: TSLA) and NIO (NYSE:NIO) are two growth stocks that have experienced sharp pullbacks recently. Since rising to $900 in late January, Tesla has fallen to $621, a decline of 31%. Meanwhile, after rising to $67 in January, NIO has fallen to $39, a decline of 45%. However, over a 12-month horizon, Tesla is still up around 330% while NIO is up approximately 960%.

Is this latest share price weakness a good opportunity for me to buy these electric vehicle (EV) stocks? Let’s take a look at the investment case.

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What I like about Tesla and NIO stock

There are things I like about both Tesla and NIO. For starters, they operate in a high-growth industry. And there’s no doubt the global electric vehicle market is set for monster growth over the next decade.

According to Allied Market Research, the market is set to be worth around $803bn by 2027, up from $162bn in 2019. That represents annualised growth of 23%.

Meanwhile in China, EV sales could rise 40% this year to reach 1.8m units, according to Xu Haidong, deputy chief engineer of China Association of Automobile Manufacturers. This kind of growth is likely to provide huge tailwinds for companies including Tesla and NIO.

Secondly, unlike many other EV start-ups, both Tesla and NIO are already delivering vehicles. And the numbers are impressive. Last year, Tesla delivered 499,500 vehicles, up 36% year on year, while NIO delivered 43,728 vehicles, up 113% year-on-year. These figures show both companies are growing at a rapid rate right now.

EV competition is heating up

However, I do have some reservations about these stocks. The first is around their competitive advantages. Can Tesla and NIO protect their market share?

Other more traditional automakers are now getting serious about EVs. According to Morgan Stanley, Ford‘s Mustang Mach-E is capturing market share from Tesla in the US. Meanwhile, Volvo recently announced that it will only sell EVs by 2030. 

Many new entrants are also set to enter the EV market in the near future. One example is Fisker. Its flagship vehicle, the Ocean, has been fashioned by Danish automotive designer Henrik Fisker, who is also responsible for the Aston Martin DB9. Fisker plans to start production next year.

It’s also worth noting that in China, Tesla and NIO face strong competition from leading domestic automaker SAIC Motor, which has partnered with General Motors to build a $4,500 mini EV. Last month, sales of SAIC’s Hong Guang Mini EV were around double those of Tesla. And, in the second half of 2020, SAIC sold 112,000 of these EVs. Other EV companies in China doing well include Xpeng and Li Auto.

My second concern is that even after the recent share price pullbacks, these stocks still look expensive. Tesla’s market-cap is around $600bn, valuing the company at $1.2m per car sold last year. NIO’s market-cap is about $62bn, valuing the company at around $1.4m per car sold. Volvo, by contrast, has a market-cap of around $50bn, valuing the company at around $76,000 per car sold, although it’s obviously not growing as fast.

Should I buy Tesla and NIO now?

Weighing everything up, Tesla and NIO are not buys for me right now. Their growth is impressive but I’m concerned about the risks.

All things considered, I think there are other safer growth stocks I could buy for my portfolio right now.

Like this one….

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK owns shares of and 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.