The NIO (NYSE:NIO) share price has plunged from a high of $63 on 9 February to $39 today. It was only worth $3 a share two years ago. As an investor who believes in the electric vehicle (EV) revolution, it’s a stock I’ve had on my radar for some time.
I’m always wary of rocketing share prices based on sentiment, rather than fundamentals. But investors seem have have priced in fears of semiconductor shortages and regulatory risks. Should I now buy the NIO share price dip?
NIO growth potential
I think NIO has strong growth prospects, if its 2021 Q2 report is anything to go by. It reported revenues of $1.3bn, an increase of 127% compared to Q2 2020. Meanwhile, losses fell from $178m to $117m. It delivered 21,896 cars, more than double the 10,331 sold in the same quarter last year.
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It’s also likely that sales were constrained by the global semiconductor shortage. If this is resolved next year, sales could rocket even higher. The company is also becoming popular for its replaceable battery packs, which mean that NIO car owners can buy two battery packs, and swap them out on longer journeys. This solves the range issue which prevents many consumers from buying their first electric car.
In May, NIO entered the European market by establishing an office in Norway. CEO William Li expects that the company will soon expand into Germany. NIO’s competitor Xpeng is already selling cars in the Norwegian market, so NIO thinks it can take market share from its established competitor. This could signal significant European growth.
The company recently signed a new contract with Jianghuai Automobile Group (JAC). JAC has agreed to expand car production capacity to 240,000 per year, indicating how quickly NIO expects sales to grow.
NIO share price concerns
Growth stocks come with elevated risks. There’s no guarantee that the semiconductor shortage will abate next year. NIO will be competing for chips with plenty of larger car companies with stronger buying power. If car sales are restrained by supply shortages, NIO may struggle to stay afloat. And a little perspective is important for the stock. While it posted revenue of $1.3bn last quarter, this was dwarfed by Volkswagen‘s Q2 revenue of $79.7bn.
Chinese authorities are also becoming uncomfortable with Chinese technology companies being listed in the US. There’s also talk of new taxes on wealthier Chinese citizens who are NIO’s target market.
And then there’s two high profile accidents to contend with. On 30 July, a NIO driver was killed after his car hit a pier and combusted. Then on 12 August, a famous Chinese entrepreneur, Lin Wenquin, died after his NIO crashed while on autopilot. The company is now being investigated by the China Passenger Car Association over its autopilot technology. Any fault found could come with crippling legal and reputational costs.
Time to buy the dip?
NIO has a price-to sales (P/S) ratio of 12. This isn’t bad for a growth stock. But it looks overvalued compared to an automotive giant like Volkswagen at 0.5.
NIO is still unprofitable, and future profitability is a speculative bet. If growth slows for any reason, the NIO share price could fall further. However, for me, buying the dip is worth the risk.
