Nio (NIO 7.51%) went public in the U.S. in 2018, but it wasn't until 2020 that Wall Street seemed to notice the Chinese electric vehicle (EV) stock. Nio rallied a jaw-dropping 1,110% in 2020, with nearly all of those gains coming in just the second half of the year. Sales of EVs were booming in China, and the company's deliveries were hitting record highs month after month.
Cut to 2022, and Nio stock is trading at one-third of its all-time highs right now. Geopolitical concerns, COVID-19 lockdowns in China, and tighter scrutiny on foreign companies listed in the U.S. are just some of the reasons Nio lost momentum over the past year or so.
But the company is trying hard to convince investors about its growth potential with new launches, new factories, and entry into new markets. The market's paying attention, too, and has driven its shares higher in recent weeks.
Could this be a value trap, or is Nio headed for a fresh bull run? Here's the bull and bear case for the EV stock to help you decide whether it's worth a bet.
Nio's bull case: Unquestionable growth potential
Neha Chamaria: Nio's deliveries and earnings have fluctuated in recent months, but much of the problems are on the supply side and not demand related. Specifically, the company is facing intense cost pressures and raw-material constraints that are hurting nearly every EV maker, including leader Tesla. And it's also had to temporarily suspend operations during the recent lockdowns in China.
Image source: Nio.
China's new-energy vehicle market, though, is rebounding, with industry sales even expected to hit a record high in June. Nio expects its deliveries to jump almost 80% sequentially in June as it ramps up production to full capacity.
As its new launches -- the ET5 sedan and ES7 SUV -- start contributing to its top line, the second half of the year should be much stronger than the first. Nio currently sells four models: three SUVs (the ES8, ES6, and EC6) and a flagship sedan, the ET7, which it started delivering in March.
Nio's quarterly delivery rate could hit 25,000 by the end of the year. It is also expanding aggressively into Europe, its first international market. Above all, the company is closer to its dream of launching an affordable mass-market brand and expects to start deliveries in 2024.
This could be a game-changer as Nio is already a top player in the premium EV market in China, and targeting the mass market is a logical next step to gain dominance. Given its growth plans, I'd rather bet on an upside in the stock than downside from here.
Nio's bear case: Don't ignore the risks
Howard Smith: Nio shares have dropped from January 2021 highs above $60 per share to a price near $22 recently. But even with such a steep decline, it still has a $37 billion market cap without positive net earnings.
The company could certainly grow into that valuation, and perhaps fairly quickly. It plans to expand its business in Europe beyond Norway to Germany, the Netherlands, Sweden, and Denmark in 2022.
But success in a new market beyond China isn't guaranteed, and that is just one of the risks in owning Nio shares. Others include regulatory risks associated with U.S.-listed Chinese stocks and more-general geopolitical uncertainties.
Some more-definitive troubles have dogged the company recently. Additional supply chain challenges brought on by COVID-19 lockdowns in China might not have been company-specific, but they markedly slowed down Nio's growth trajectory.
Data source: Nio. Chart by author. TTM = trailing 12 months.
These issues haven't stopped the company's growth completely. First-quarter vehicle deliveries were still 28.5% higher than the prior-year period. But they grew a mere 3% sequentially from the 2021 fourth quarter.
That doesn't mean that Nio can't be a great investment. But it highlights the fact that investing will always include risks. Nio's valuation adds to the risk that the stock could go nowhere, or drop, in the near term. Its nearly 30% decline year to date helped to price in some of the risk -- and show how volatile it can be. Investors should be sure to put any shares in the speculative portion of a portfolio, and to enter an investment with patience in mind.
NYSE: NIO
Key Data Points
The bulls might have an upper hand here
China's EV market is booming, and Nio is a key player in it. That alone adds to the appeal of investing in the automaker. Yet like most young companies in an industry that's only just getting started, Nio isn't free from risks. It's also a Chinese stock, and investing in shares of foreign companies itself is a risky proposition. The difference though is that Nio has already established a strong foothold in the world's largest EV market and has also entered into Europe.
Its recent moves and growth plans look promising. Sure, it won't be a smooth ride and Nio stock could oscillate wildly, but it should win big nonetheless in the long term if the EV maker's plans bear fruit. With the stock also dropping so hard in the past year or so, Nio could have more upside from here than downside.
