NIO (NYSE:NIO) shares are down 73% over the past 12 month. There are several reasons behind the collapse. However, the company’s long-term viability is not one of them.
Falling share price
Like other tech stocks, NIO became very expensive during the pandemic. In early 2021, the company had a market cap around $100bn. That’s absolutely huge, especially for a firm that was delivering around 20,000 cars a quarter.
The falling share price can be attributed to two events, largely beyond NIO’s control.
Firstly, 2022 started with a tech sell-off, prompted by a surge in US Treasury yields. This impacted growth stocks more than value stocks, as the former are valued on future revenue expectations.
However, the performance of Chinese EV stocks has been impacted further by the nation’s Covid-19 policy. Lockdowns have hampered production and the supply chain, but the threat of more restrictions has served to prevent upward movement in the share price.
More recently, and perhaps less importantly, is the formation of President Xi Jinping’s new cabinet — composed entirely of loyalists. To some, the new cabinet represents a move towards autocracy, and that’s rarely a good thing for business.
Why I’d buy now
In the long run, I’m not too concerned about China’s Covid policy. I’m hopeful that the government will continue to reduce restrictions over time, as is the case elsewhere in the world.
And it’s worth noting that NIO’s performance has improved throughout the year as Covid restrictions were incrementally relaxed.
In Q3, NIO’s vehicle sales jumped 38.2% year on year, generating around $1.68bn in revenue. Moreover, the company delivered 10,059 vehicles in October 2022, representing a massive 174.3% yoy increase.
This accelerated pace of growth is expected to continue in Q4. Nio expects to deliver between 43,000 and 48,000 vehicles in the months to December — this would represent yoy growth of around 71.8% to 91.7%. Revenue for Q4 is expected between $2.4bn and $2.7bn.
The company’s growth is once again resembling that of Tesla. And there are more positive signs. Auto sales in China increased by 6.9% yoy to 2.51m units in October of 2022. Meanwhile, full electric cars accounted for 22% of new car sales in the Chinese market during the month.
I’m also impressed by NIO’s EV offering. The Shanghai-based firm has six models on sale — more choice is normally positive for sales. The vehicles are packed full of the latest tech and feature unique battery-swapping technology, allowing drivers to swap empty batteries for full ones in a matter of minutes.
The latest Et7 even has a range of 1,000 km, the firm says. That puts the Chinese firm ahead of Tesla –although testing standards do differ.
I believe NIO has a very positive future ahead of it. And, right now, its valuation looks very attractive. NIO currently trades with a price-to-sales ratio of around 2.8, far less than Tesla at 7.5. I already own NIO shares, but because of the above, I’m buying more.
