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Why Nio Stock Dropped 16% in July

By Howard Smith – Aug 4, 2021 at 4:18PM

Key Points

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Much of what drove investors out of Nio in July was related to country-related risk.

What happened

The returns in the stock of Chinese electric vehicle (EV) maker Nio (NIO -5.82%) crossed into the red for the year in July. But much of the decline had less to do with company-specific information and more to do with more general risks related to owning shares in Chinese companies. For the calendar month, U.S.-listed shares in Nio were down 16%, according to data provided by S&P Global Market Intelligence.

So what

All equities come with risks, but there can be certain unique risks with owning international companies. The latest concerns with Chinese stocks began after ride-hailing company DiDi Global went public on the New York Stock Exchange on the last day of June. Chinese regulatory officials subsequently launched what was dubbed a cybersecurity review of DiDi and prohibited new downloads of the company's app. 

Nio electric vehicles being loaded for delivery to Norway.

Nio electric SUVs being loaded for delivery to Norway. Image source: Nio.

The Chinese Communist Party (CCP) then targeted for-profit education companies. Stocks in the sector plummeted when regulators said they will enforce new rules that don't allow private tutoring companies to raise capital and effectively could make them not-for-profit entities. Nervous investors sold shares in other Chinese companies including Nio due to new uncertainty that the CCP could seemingly wipe out investments at will. 

Now what

The stock recovered some of those losses as investors also have some company-specific progress on the horizon to look forward to. Nio had previously announced it would soon be selling vehicles outside of China for the first time. Nio said that it sent the first shipment of its flagship ES8 electric SUVs from Shanghai destined for its first European market in Norway on July 20. 

Nio is also in the midst of growing its capacity to double its current capabilities with a new manufacturing agreement signed with state-owned partner Jianghuai Automobile Group (JAC). That connection with a government entity may serve to insulate the company from the wrath of Chinese regulators. And the combination of increasing production capacity and a move into another large market should help give investors confidence that the company could eventually grow into its valuation. 

Nio said it delivered more than twice as many vehicles in July as it did in the prior-year period. Though some of its domestic competitors exceeded its July sales, much growth potential remains, inside and outside of China. 

The July decline in shares didn't make Nio cheap to own. It still has a market cap of over $70 billion, making any added risk or misstep in progress likely to hit the share price again. Investors will be watching when the company reports its second-quarter update next week on Aug. 11.  

Howard Smith owns shares of NIO Inc. The Motley Fool owns shares of and recommends NIO Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

Nio Stock Quote
Nio
NIO
$12.63 (-5.82%) $0.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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