NIO (LSE: NYSE) stock has been under pressure during the past few weeks as investors are becoming increasingly concerned about the company’s outlook.
Year-to-date, the shares have fallen around 28%. Since the beginning of July, they have fallen 25% and are below $39 as I write.
However, NIO stock has returned 105% over the past year. So, long-term investors have been well rewarded for owning the shares during the past 12 months. Not that past performance should never be used as a guide to future potential.
Just because shares in the electric vehicle manufacturer have returned more than 100% over that period, it does not mean they will repeat the performance over the next year. Indeed, there is a chance the stock could drop further, even to $30 or lower in the future.
NIO stock outlook
Shares in NIO have been under pressure for two reasons over the past few weeks.
First of all, the organisation is suffering from production pressures. The global chip shortage is threatening the group’s annual production targets.
And secondly, China’s crackdown on overseas company listings has sparked concern that regulators will pull the plug on NIO’s US market listing.
As Chinese businesses cannot legally IPO in New York, they use a structure called a Variable Interest Entity (VIE). This is essentially an offshore entity that has rights to the underlying company’s profits. The structure allows foreign investors to buy the stock, but it has never really been approved by Chinese policymakers.
There are growing concerns that China could clamp down on these structures. This would have a devastating impact on NIO stock and other New York-listed Chinese stocks. As of yet, regulators have not signified they will clamp down, although with China, anything is possible. In this scenario, NIO stock could slump below $30. Its value may even drop to zero.
Production challenges could also send the stock sliding. With a market value of $62bn, the company’s output needs to justify its valuation.
The organisation cut its vehicle delivery target for September from between 23,000 and 25,000 to between 22,500 and 23,500. This shows the scale of the challenges the group is facing. It also recently filed to issue another $2bn in shares to raise more cash to fund its operations.
The lower rate of output, newly issued shares and regulatory headwinds could all push NIO stock down below that $30 mark.
Tailwinds in place
Having said all of the above, there’s no guarantee the stock will fall below this level. The company is working towards becoming one of the world’s premier electric car producers. It has recently signed agreements to double output and launch a new range of electric vehicles with Lotus.
Further, Chinese policymakers may actively work to promote the company to help the country meet its renewable energy ambitions.
As such, while the corporation may face some headwinds, it’s not all bad news.
Still, despite the potential of NIO stock, I would not buy the shares today. I think the firm is just facing too many challenges.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Rupert Hargreaves 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.