China is the largest automotive market in the world and has been an early adopter of electric vehicles (EVs). But competition is growing, and one Wall Street analyst thinks that could make it more painful for investors in Chinese EV maker Nio (NIO +5.50%).
Macquarie Equity Research analyst Eugene Hsiao isn't bullish on Nio's stock, but he does think it has dropped too far. He rates it "neutral" but sees share prices getting back to $5 over the next 12 months. That would be a gain of 30% for investors from its recent level.
EV demand and rising competition
The stock has dropped as EV demand has slowed in China and elsewhere. Nio shares are down by nearly 60% so far this year. Investors have fretted that the timing of the demand drop doesn't bode well for smaller EV makers like Nio just as competitive offerings are increasing.
NYSE: NIO
Key Data Points
Hsiao believes the Chinese EV market has matured enough that successful EV makers will now have to tap a larger market focused on lower-priced vehicles. He summarized it by saying: "China's EV market is now well past the early adopter stage of the S-curve and firmly into mass adoption. This shift means previously niche start-up EV pure plays need to chase volume in the mass market."
Nio management also likely believes that to be the case. The company plans to reveal a new mass market sub-brand next month. If it follows in line with other Chinese EV makers launching lower-priced brands, it could offer vehicles priced as low as about $20,000.
The analyst is more bullish on other Chinese EV makers, however, particularly those that offer hybrid vehicles. That's why he isn't recommending that investors buy Nio right now. But Nio also has a competitive advantage from its battery swap and other technologies. And the analyst still sees meaningful gains ahead for Nio stock.
Investors who think Nio can successfully add a lower-priced brand could do well to buy shares now.
