Growth stock crashes rarely come harder than we’ve seen from electric vehicle (EV) maker NIO (NYSE: NIO) in the past few years. From a high in November 2021, the NIO stock price has fallen by a whopping 93%.
That’s not as bad as our very own Aston Martin Lagonda mind, down 96% since IPO. Coincidentally, it’s also a car maker. And it’s moving into electric vehicles too.
Bubble burst?
I’ve seen this kind of thing many times over the decades. A growth stock darling catches the imagination, and investors pile in and push the stock price up.
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Then the market steps back and does a reality check. Can we really justify a price like this, when there are no profits in the cards yet? How can we tell how much it’s worth when we can’t even work out any fundamental stock valuation?
The numbers start to look scary, those who piled in pile out, and the stock slumps. Yes, I’ve seen it time and time again. I’ve been burned by it.
Second chance
But that can often be a great time to get in. A second chance at a missed golden opportunity. And I’ve had some success buying into growth stocks in time for a second wind to blow them higher again.
So why won’t I buy NIO stock now? Well, let me start by thinking about might be good about it.
When a tech stock’s fallen this far, it might not take much to send it back up again. Even a relatively modest recovery in 2024, still way down on those earlier highs, could still mean a quick price double. Or even a three- or four-bagger.
Falling sales?
In its first quarter of 2024, NIO reported a fall in sales. And that doesn’t look good.
But the whole EV market is a bit squeezed now. Global inflation, high interest rates, weak economies… they’re not the things that drive top-end motor sales, or technology generally.
So I can’t help feeling this might turn out to be a buying opportunity. Even if the weakness continues to the ened of the year, I reckon 2025 could be better for the market altogether.
Competition
The biggest risk for me though, is that NIO is in a very competitive market. Even in China, other makers have caught up with its early mover advantage.
The infrastructure for EVs in China, and for NIO specifically, just isn’t as well developed as it is for, say, Tesla in the West. So I can see a few more years of cash burn before there’s any sign of profits. And in a fast moving market like this, I’ve no idea who’s likely to be ahead by then.
Buy the best?
If I bought into a tech sector like this, I’d be looking for the pioneering best in the sector. The companies with the most widely accepted technologies. And those working in a free global market.
Saying that, I wouldn’t even buy Tesla stock right now. But that’s for another day.
