What happened

Electric-vehicle (EV) stock Nio (NIO -5.00%) plunged on Tuesday, dropping as much as 5% by 12:10 p.m. ET. As if the new, potentially more dangerous COVID-19 variant, Omicron, wasn't enough to spook the markets, latest comments from the Federal Reserve and particularly Tesla's (TSLA -1.92%) Elon Musk seem to have put investors in Nio on edge.

So what

The stock markets have been choppy ever since the new COVID-19 variant was first reported from South Africa late last week. With multiple nations quickly banning flights and imposing restrictions, investors fear yet another period of lockdowns in the U.S. could bring any economic recovery to a grinding halt. That doesn't bode well for manufacturing companies, whether they build in the U.S. or only sell in the U.S., like Nio.

A person in a mask studying a falling stock price chart on a computer screen.

Image source: Getty Images.

Reinforcing investors' fears, the Federal Reserve confirmed today that Omicron, indeed, poses a potential threat to the U.S. economy, and with inflation already sky-high, the Fed may consider hiking interest rates sooner than expected.

Money flies out of stocks into bonds as interest rates rise, with high-flying stocks usually bearing the brunt as investors scramble to take profits off the table. For that matter, Nio shares have hugely underperformed most EV stocks this year, but investors aren't taking a chance even with the stock's short-lived rally in recent weeks.

There's another, perhaps even bigger reason why Nio shares dropped today. In a tweet, Elon Musk warned the global semiconductor chip-supply shortage isn't over yet.

The chip shortage has hurt nearly every automotive company this year, but some of Nio's rivals have displayed remarkable resilience as reflected in their vehicle deliveries in recent months. For example, just yesterday, China's Li Auto (LI -9.60%) reported an astounding 190% year-over-year jump in third-quarter deliveries of its only SUV, Li One, and another 107% jump in deliveries for the month of October.

In sharp contrast, Nio recently reported a 27.5% decline in deliveries for the month of October. Nio largely blamed lower production for the decline as it restructured and upgraded its manufacturing facilities; it also mentioned supply-chain volatility as a major challenge.

Right when investors were hoping Nio could put chip-supply concerns behind in the coming months, Elon Musk poured cold water with his latest warning. Tesla's Model 3 and Model Y are among the best-selling new energy vehicles in China and are far ahead of Nio's vehicles in terms of sales. While Tesla is finding it hard to navigate supply-chain challenges, investors in Nio perhaps don't expect any better from their company.

Now what

Nio seems to be taking a hit from all sides, and the stock could remain volatile. Yet, with Nio shares also lagging peers so far in 2021, every positive step from the company henceforth could have the potential to send its stock soaring. The biggest step could be the timely launch of its much-awaited flagship luxury sedan ET7 in 2022, with reports suggesting Nio is set to open reservations in January 2022. Keep an eye out.