It’s fair to say that 2022 probably hasn’t started well for most investors. Then again, my heart does go out to anyone holding NIO (NYSE: NIO) stock in particular. The value of the Chinese electric vehicle (EV) maker has tumbled 38% year-to-date. But does this make it a buying opportunity for me?
NIO stock: is the drop overdone?
As one might expect, the capitulation of NIO’s share price isn’t down to one single factor. The crackdown by Chinese regulators on US-listed stocks hasn’t been warmly received by the market. The rise of the Omicron variant has also kept traders on their toes, as has the threat of earlier-than-expected rises in interest rates.
Even so, the fall in the price of NIO does seem overdone considering that it recently reported delivering 10,489 vehicles in December. That’s a near-50% jump compared to the same month in 2020. In November, the company also announced a Q3 loss narrower than that predicted by analysts.
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Where next?
There are reasons for thinking the worst is over if it’s able to hit its own targets. As things stand, somewhere between 23,500 and 25,500 vehicles are expected to be delivered in Q4, comparing favourably to the 17,000-odd achieved one year ago.
Excitement over new vehicles could also lead to the company surprising on revenue. This stands at between $1.455bn and $1.568bn for the current quarter, compared to ‘just’ $1.017bn in 2021.
Having said this, there’s no rule that says NIO stock won’t fall further. It’s clear that the global shortage of semiconductors won’t be fixed in a few weeks. And while it has already warned this will affect sales growth, NIO could be forced to revise its numbers in the next update.
It may also continue to be a victim of circumstances beyond its control. These include the ongoing rotation into value stocks that’s been apparent since the beginning of the year.
Competition hots up
But there are other reasons I’m wary. For one, competition in the EV space will surely only get hotter as more established manufacturers catch up with the pioneers. NIO may emerge a victor but I don’t have the specialist knowledge to be able to say how likely this is. And as an investor, it’s never a great idea to leap beyond one’s circle of competence.
Another drawback is that a new car will never be considered an essential purchase. In other words, many of us can elect to keep our existing vehicles during troubled times. Sure, the arrival of legislation forbidding the sale of petrol and diesel cars from 2030 will force the adoption of EVs in the UK at least in the end. But how frequently do I plan to replace my car after that? Not very often.
Story stock
I don’t blame anyone for getting excited about NIO stock and the EV revolution in general. There aren’t many more seismic investment themes right now.
Nevertheless, the huge selling pressure seen over the last 12 months serves as a reminder that a compelling growth story isn’t enough when the market hits an inevitable sticky patch.
Ultimately, NIO must be seen to be pulling ahead of the competition if it’s to recapture its lost form. I’m prepared to wait for that moment, if it comes at all, before putting my money to work here. In the meantime, I’ll get my exposure to EVs via this immensely popular fund.
