The NIO (NYSE: NIO) share price has plunged this year. Year-to-date, shares in the electric vehicle producer are off 33%. The stock has declined nearly 19% in the past month.
Still, despite this performance, shares in the business have returned nearly 1,000% over the past 12 months. Long-term investors have been handsomely rewarded for sticking with the company over the period.
However, past performance should never be used as a guide to future potential. Just because the company has performed so well over the past year doesn’t necessarily mean it’ll continue to outperform the market as we advance.
NIO share price opportunity
NIO is trying to become the ‘Tesla of China’. The China-based business is focused on developing upscale electric vehicles at an attractive price point. As Tesla has already proved, there’s a vast and growing market for these sorts of vehicles. China is also the world’s largest new vehicle market.
In my opinion, there’s no denying NIO has enormous potential. The business is targeting 100,000 car sales in 2021. And there’s speculation the company could be selling a few million cars by the middle of the decade. Last year, it sold 43,000 vehicles.
But here’s the thing, NIO is very richly valued. The company’s market capitalisation currently stands at just under $60bn. By comparison, peer Ford is worth just $48bn. Ford sold 4.2m vehicles last year.
However, according to some analysts, this valuation is justified. Considering its long-term potential, the corporation should be worth significantly more than traditional carmakers, analysts argue. The average Wall Street price target for the company is $62.04. That’s nearly 80% above current levels.
Risks and challenges
Of course, these are just projections. They assume the best-case scenario. Designing and producing cars is a highly competitive market, and it’s only becoming more so.
Over the past 12 months, a whole host of electric vehicle companies have gone public, including London-based start-up Arrival. These businesses are all vying for market share and spending tens of billions of dollars developing new vehicles. At this stage, I think it’s impossible to say which ones will succeed and which will fail.
Therefore, I’m not in a rush to buy NIO shares after its recent performance. I can’t deny the company may have tremendous potential, especially in its home market. It’s quickly taking market share in China and has a lot of supporters in the country. But, in my opinion, that doesn’t guarantee success.
That said, I do think electric vehicles are the future. That suggests to me NIO may meet its ambitious production goals over the next few years. However, as an investment, I’d rather choose a more established player. I’d rather own companies such as Tesla or Volkswagen as these businesses are already producing hundreds of thousands of electric vehicles every year.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. and 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.