On the heels of recent spy balloon incidents, tensions between the U.S. and China are again on the rise. What does this mean for shares in China-based EV maker Nio (NYSE:NIO)? Admittedly, not much. Sure, while it may serve to re-heighten past de-listing fears for NIO stock, for now, it does little to change the story here.
Still, while geopolitics may not be a significant issue, there’s something else at play that leaves shares at risk of experiencing a severe move lower between now and the end of 2023: a continued growth slowdown.
The market is aware of this issue, implying this risk is fully accounted for in the stock’s valuation. Yet if you take a closer look at the situation, it’s clear that this is not the case. Eventually, this disconnect will be resolved.
When that happens, watch out. Shares could be en-route to hitting new multi-year lows.
| NIO | Nio | $10.31 |
The Biggest Issue at Hand
Geopolitical news has had only a modest negative impact on Nio shares. I wouldn’t expect it to have much more of an impact on the stock’s performance. It’s a different story, however, when it comes to slowing growth.
This is bad news for NIO stock, as this factor is arguably the biggest issue on hand with NIO stock. There is a dangerous disconnect between the market’s expectations about future results, and the strong chance this rosy scenario fails to play out.
As I have discussed previously, Nio is facing sales challenges right now. Last month, Nio’s deliveries dropped off for a variety of reasons that could persist, such as the end of China’s EV subsidies. The company is at risk of staying in this slump for the next few months. However, investors are overly hopeful when it comes to how quickly things will improve.
That is, the market anticipates the company’s operating performance to greatly improve in the latter half of 2023, due to both the rollout of new vehicle models, alongside a rebound in demand due to China’s “reopening,” following last year’s stringent “Zero Covid” lockdowns. However, this re-acceleration narrative could soon be proven wrong. Here’s why.
Two Reasons Why the Slump May Continue
Rather than coming to an end later this year, the Nio sales slump could carry on through the rest of 2023. The reasons for this are twofold. First, there’s the issue of rising competition.
This is largely due to the emerging “EV price war” in China. Back in January, Tesla (NASDAQ:TSLA) slashed its Chinese vehicle prices. This was likely a larger factor in January’s weak sales figures than fans of NIO stock want to admit. It remains to be seen whether the immediate surge in demand for Tesla vehicles following the price cuts carries on.
But some sell-side analysts, such as Wedbush’s Dan Ives, are bullish that Tesla will gain and hold onto a greater share of the Chinese domestic EV market. This will come at the expense of domestic brands such as Nio. Second, it’s possible that the market is overestimating the extent of China’s reopening.
A more modest economic recovery for China may also limit the extent to which Nio’s sales growth picks back up later this year. In the coming months, if both these factors result in further disappointing deliveries/sales figures, confidence in the “re-acceleration” narrative will drop. So will the price of NIO shares.
The Verdict
Although it may happen gradually, there remains a strong chance that continued disappointment sends NIO (trading for just over $10 per share day) back down to single-digit prices and to its 52-week low ($8.38 per share).
That’s not all. I continue to be skeptical that Nio’s move into this Europe will pay off as currently expected. In Europe, not only is it competing with Tesla but with incumbent automakers that are rolling out their own respective EV models.
Some of Nio’s China-based peers are trying to enter this crowded market as well. More than disappointment in its home market, disappointing results in Europe may be enough to send shares to multi-year lows.
Still, at risk of a big pullback due to strong chances of a continued slowdown in growth, keep away from NIO stock.
NIO stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.