What happened

Many stocks in the electric-vehicle (EV) sector are sinking today, and Chinese EV maker NIO (NYSE:NIO) is no exception. With its fourth-quarter and full-year 2020 earnings looming, shares dropped as much as 10% Thursday and remain down 7.6% as of 2:45 p.m. EST. 

So what

Fellow Chinese EV maker Li Auto (NASDAQ:LI) reported its fourth-quarter earnings today, but the results shouldn't be scaring investors in the sector. Li Auto reported a surprise profit for its fourth quarter, which could bode well for what NIO has to say when it reports on Monday, March 1. 

But investors are knocking back stocks of these high fliers today after extended runs brought high valuations.  

NIO ET7 electric sedan parked beside a reflecting wall.

NIO ET7 electric sedan. Image source: NIO.

Now what

Li Auto reported a surprise positive net income of $16.5 million for its fourth quarter. While NIO competes with LI Auto, the companies offer slightly different products. Li's One SUV was designed to serve a specific niche in China. It includes a small gasoline engine onboard that can be used to recharge its batteries, allowing for longer travel between charging stations.

NIO delivered 7,225 vehicles in January 2021 and 17,353 in its fourth quarter. These represented 352% and 111% year-over-year gains, respectively. NIO recently announced its first luxury sedan, the ET7, which will also have a new longer-range battery option. 

Including today's drop, shares have already fallen more than 20% from highs earlier this year. NIO's earnings on Monday could help soothe investor anxiety over the stock's high valuation. But for now, a correction remains under way. 

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.