Over the last 12 months, there’s been a nearly 75% decline in the price of NIO (NYSE: NIO) stock. Electric vehicle (EV) stock valuations rose in 2020 and 2021, but that bubble looks to have burst.
Undoubtedly NIO is facing a variety of economic and geopolitical headwinds, but there may be cause for optimism. And last week, investor sentiment improved and the share price soared 23%. What changed and should I buy the stock today?
Meme stock
Huge price swings are par for the course when it comes to investing in NIO and this has been the case ever since its September 2018 IPO.
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| Period | Performance |
| Last week | 22.56% |
| Last month | – 27.18% |
| Last six months | – 24.06% |
| Last 12 months | – 72.38% |
| Since Septemer 2018 IPO | 17.98% |
Why is it so volatile? Firstly, it has often traded like a meme stock, roared on by social media channels. These high-risk speculative plays have little to do with fundamentals and often resemble more of a gamble than an investment. There has been similar behaviour with other EV stocks, but NIO faces other unique challenges.
The stock could be delisted from the New York Stock Exchange. Many Chinese stocks on US exchanges face a similar fate if they don’t provide complete access to audit working papers. As China-US relations appear to be worsening, this is a real possibility. In that eventuality, shareholders rights around NIO wouldn’t be directly affected but the holdings would be harder to sell and the share price could collapse.
There are also domestic and international policies hindering production and growth. The US government has cracked down on chip exports to Chinese companies, putting further pressure on production targets. Meanwhile, Beijing’s strict zero-Covid policy has forced some of its factories to close, delaying deliveries.
Has the stock price bottomed?
NIO soared last week, rising 17.5% on Friday alone. This was after a report in The Wall Street Journal suggesting China may loosen that zero-Covid approach. But these are rumours and there’s been no confirmation from the government. However, fewer restrictions should enable higher growth and put the firm back on a path to growth and profitability.
Whether or nor the policy is loosened, it’s important for me to shut out the noise to assess the value of the shares. That’s tricky as the company isn’t profitable, but the crux of the bull case is the enormous growth potential of the EV industry. In fact China has the largest and fastest-growing EV market globally. NIO has benefited from this rising demand, as well as government subsidies and increased investment in EV infrastructure. Through referral programmes and VIP clubhouses it has built a loyal customer base. The opportunity in China alone is huge, but it has started to expand internationally too. Its cars are now for sale in Denmark, Germany, Norway, Sweden and the Netherlands.
So would I buy the stock today? The company’s growth potential excites me, despite the speculation and volatility. However, China-US relations may get worse before they get better. Contrarian investing can be rewarding but there’s a reasonable chance that the stock will be delisted. There are too many unpredictable factors separate from the company’s fundamentals, so I’m continuing to stay clear.
