What happened

Shares of NIO (NYSE:NIO) were trading lower on Tuesday, as selling pressure on category leader Tesla (NASDAQ:TSLA) put pressure on shares of NIO and other publicly traded Chinese electric-vehicle makers.

As of 1:15 p.m. EDT on Tuesday, NIO's American depositary shares were down about 3.1% from Friday's closing price.

So what

Tesla's shares were down sharply on Tuesday after Standard & Poor's declined to add the company to the S&P 500 index, a decision that surprised auto investors who have bid up the Silicon Valley company's shares in recent months. The selling pressure on Tesla likely weighed on NIO's shares, as well as those of electric-vehicle rivals Li Auto (NASDAQ:LI) (down 4.8% at 1:15 p.m.) and XPeng (NYSE:XPEV) (down 5.5%). 

NIO's decline might have been mitigated by a bullish Tuesday morning note from Deutsche Bank analyst Edison Yu, who initiated coverage of NIO with a buy rating and a price target of $24.

A blue NIO EC6, an upscale five-passenger SUV with a sporty coupe-like roofline

NIO will begin deliveries of its new EC6 crossover by the end of this month. Image source: NIO.

Yu sees NIO as the leader of an emerging class of well-financed Chinese electric-vehicle makers that includes Li Auto and XPeng, as well as not-yet-public WM Motor. Of the four, Yu wrote, NIO leads with stronger brand perception, higher sales volume, its focus on the white-hot premium-SUV segment, and its "battle-tested" operational track record. 

Now what

While Yu thinks that NIO is the leader of the group, he wrote that all four should be able to comfortably coexist with Tesla in China, given the size and upward trajectory of the country's electric-vehicle market. He thinks NIO in particular is well positioned to take share in the premium end of the market, where profit margins are typically strong. 

I tend to agree with Yu's take. After a difficult start to the year, NIO has rebounded well with rising sales, a strong new-product pipeline, and ample cash to fund the next phases of its growth plan. While the stock could hit turbulence in the near term if the Tesla sell-off continues, the company's intermediate-term prospects look bright if it continues to execute as well as it has in recent months. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.