The NIO (NYSE:NIO) share price has been moving like a rollercoaster since the start of 2021. After the electric vehicle manufacturer saw its valuation get nearly cut in half in the first couple of months, the stock is now back on the rise. And since mid-May, it’s up more than 50%. Despite the recent volatility, the NIO share price is still up by almost 530% over the last 12 months. But what’s causing the sudden bounce-back of the stock? And is it too late to buy?
The rising NIO share price
The NIO share price initially started to tumble after the management team announced that the global semiconductor shortage is impeding production capacity. This consequently led to lacklustre car production guidance for investors. And for several months, there was plenty of uncertainty. Since inflation fears were also on the rise, I’m not surprised to see the stock take a hit.
But then, around the middle of May, the China Passenger Car Association published new data regarding electric vehicle (EV) sales statistics within China. It revealed that the firm’s leading competitor Tesla was having difficulty penetrating the Chinese market. NIO’s SUV became the best-selling EV of its type while simultaneously securing a 25% market share.
Since then, NIO has continued to expand its business operations. Recently, the CEO confirmed that the construction of its second production facility is now under way. And once complete, it will be able to increase the company’s capacity by a further 20,000 vehicles per month. Meanwhile, the group also received regulatory approval to distribute its ES8 model throughout Europe, opening an entirely new market to sell its electric cars.
Needless to say, this is incredibly positive news. So the rising NIO share price makes perfect sense in my mind.
The risks that lie ahead
As promising as NIO’s recent progress has been, the company still has several challenges to overcome. The most immediate is the semiconductor shortage. Producing chips is a lengthy process. And submitting new designs to manufacturers can take months before any completed chips arrive. Consequently, the current shortage isn’t likely to be resolved overnight, which in turn means that NIO’s production capacity will remain depressed.
This will no doubt continue to impede the business’s ability to expand. That’s quite problematic for a growth stock, especially since its valuation appears largely driven by investor expectations of future growth. Based on the current NIO share price, the group’s market capitalisation sits around $77bn. By comparison, its forecast revenue for 2021 is only expected to be $5.3bn. That’s quite a premium, in my opinion.
The bottom line
I think it’s fair to say that demand for EVs isn’t likely to be disappearing any time soon. And so far, NIO looks like it could become one of the leading players within the industry. An industry, by the way, that could be worth around $2.5trn by 2027.
But valuation does matter. And despite the enormous growth potential for NIO’s share price, it simply looks too high in my eyes. Therefore the company will continue to sit on my watch list for now.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. 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.