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The NIO share price plunges! Should I buy or avoid the stock?

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The NIO (NYSE: NIO) share price has plunged over the past six months. The stock’s off 33% since the end of January. It’s fallen 20% in the last four weeks alone. 

While these declines are notable, they need to be put into perspective. Over the past year, investors have seen a return of 221%. So investors who were early to the party have been well rewarded. 

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Still, past performance should never be used as a guide to future potential. And it’s what might happen next that seems to be troubling the market. 

Will the NIO share price disappear? 

Investors have been selling Chinese stocks over the past few days after the country decided to take a more aggressive approach to regulating its technology industry. 

Not only have the country’s regulators started to take action against large tech giants, but they’ve also moved on the listing process many companies have used to raise money in the United States. 

Most Chinese companies use what’s known as a variable interest entity (VIE) to raise money in New York. These are offshore vehicles that allow foreign investors to own Chinese businesses.

The structure of these vehicles can be incredibly complicated but, put simply, VIE owners have the right to company profits. However, they have no control over the underlying entity as they would do with a traditional listing. 

Another drawback of using VIEs is the fact the Chinese government has never formally approved these vehicles. It’s only tolerated them. And now it’s starting to ban them. Earlier this week, the government said it would ban tutoring businesses from using the VIE structure. The New York-listed shares of these companies crumbled more than 60% after this announcement. 

The NIO share price is linked to a similar structure. Technically, investors buying the stock are buying shares in a Cayman Island offshore entity. If China decides to clamp down on these structures, it’s not clear what, if anything, investors would be left with. 

Buy or sell?

While China has started clamping down, there’s no guarantee it’ll continue. It may decide to tolerate some VIEs as this has, historically, been a good way for Chinese companies to raise capital in New York. China may continue to allow this in order to maintain investor confidence. 

When it comes to NIO, I’ve always been encouraged by the company’s progress in the electric vehicle (EV) space. If it’s allowed to continue trading, the stock is likely to reflect its growth in the long run. The group delivered 6,711 vehicles in May, a 95% year-on-year increase.

For the second quarter, the group targets an output of 21,000-22,000 units, making it one of the world’s largest pure-play EV manufacturers. 

However, I’ve always favoured the company’s competitor, Tesla, as the best buy in the EV space. I believe it’s more experience in the sector and a more substantial reputation. As such, I’m not interested in the NIO share price, even after its recent decline. 

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Rupert Hargreaves has no position in any of the shares 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.

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