NIO (NYSE: NIO) stock has struggled in recent months, falling from highs of $63 in February to under $40 currently. This has been caused by a general sell-off in growth stocks, alongside fears over the semiconductor shortage and issues with Chinese companies. But this dip means that Nio stock is at its cheapest level for around three months. Is this now the perfect time for me to buy?
Growth in the company
There is no doubt that NIO has extremely strong growth prospects, as demonstrated over the past year. Indeed, in the recent second-quarter trading update, the Chinese EV company posted revenues of $1.3bn, an increase of 127% from the same period last year. Car deliveries were also able to reach nearly 22,000, and this represents a 111% increase year-on-year.
The future also looks bright for NIO stock. In fact, it recently renewed its manufacturing agreement with Jianghuai Automobile Group (JAC) until May 2024. JAC will also expand its annual production capacity to 240,000 vehicles per annum.
This should help satisfy the rising demand for electric vehicles, especially in China, which is the largest automotive market in the world. NIO has also expanded into Norway in recent times, which may indicate the start of a major international expansion. I reckon these are all factors that could propel the company’s growth over the next few years.
Risks
With any growth stock, there are always going to be risks, and this is no different for NIO. For example, the current semiconductor shortage is causing havoc in the automotive industry, and this is also affecting NIO. Indeed, in today’s delivery update, the company had to adjust its expected third-quarter vehicle production to around 23,000, from a previous estimate of 24,000. This may signal that growth is starting to slow and this is the reason why NIO stock is falling today.
As a Chinese company, there is also the risk of regulatory issues. This is because Chinese regulators have recently been cracking down on Chinese companies that are listed in the US, and this could include banning US listings for Chinese firms altogether. Although the effects on NIO and other Chinese EV companies are not too clear yet, such uncertainty may continue to strain the NIO share price.
Finally, the stock does still have a high valuation, with a forward-looking price-to-sales ratio of around 12. This can be contrasted to other automotive companies, like Daimler, which has a price-to-sales ratio of just 0.5. Further, NIO is still unprofitable, and it is hard to determine when it will be able to reach profitability. This means that the stock is a speculative buy, and if growth starts to slow, the share price is also likely to fall.
Is NIO stock going to take off?
Its growth prospects are evidently extremely strong. Therefore, if revenue growth remains at its current rate, I feel that the stock will explode at some point. But I’m holding off buying for now, as I believe that there is further to fall in the short term.
