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NIO action: there is always more risk than short-term reward


So far this month, two factors have allowed shares in the Chinese electric vehicle company Nio (NYSE:NIO) to return to $ 40 per share. First, concerns about investing in China have eased somewhat. Problems like Evergrande (OTCMKTS:EGRNF), as well as China’s crackdown on some of its biggest companies, weigh less on names like the NIO share.

Source: Various photographs / Shutterstock.com

Second, the US stock market, as measured by indexes like the S&P 500, has recovered from its losses last month. Just as concerns about China have eased, so have the worries that led to the decline in equities at the end of September (Federal Reserve, rising inflation, rising bond yields) subsiding.

Along with his announcement of another month of solid deliveries, it may look like Nio has enough on the line to continue his rebound. Or does he do it?

Fears among US investors about buying Chinese stocks have subsided. But there is always something that could impact the stocks of companies with high exposure to the country. Although the market ignored inflation, interest rates and diminishing worries for the umpteenth time, it could still cause stocks (especially growth stocks) to fall sharply.

Add it all up and (in the short term) there is always more risk than reward. So it is better not to buy at today’s prices.

Results remain strong for NIO stock, but for how long?

As reported on October 1, Nio recorded a record high in monthly vehicle deliveries. For September, the electric vehicle maker delivered 10,628 vehicles. This is 125.7% more than the deliveries of the month of the previous year and 80.7% more than the 5,880 vehicles delivered in August. To top it off, in the same press release, the company revealed that it has completed its first batch of deliveries to Norway, its first market outside of China.

What are the takeaways here for the NIO stock? For one thing, the global chip shortage may no longer be something affecting its bottom line. In turn, he might be on track to achieve revenue growth plans for this year (120%) and the next (65%). Along with that, now that Nio has opened its doors in Norway, in the coming months we will have our first indication whether this company, so far entirely a game on the rise of electric vehicles in its domestic market, is on the way to become a global electric vehicle. manufacturer tied with You’re here (NASDAQ:TSLA).

On the other hand, while I cannot dispute these good results, I can say that there is currently an emerging issue that could threaten the right time to keep rolling for the company: the economic slowdown in China. . After strong GDP growth fueled by the country’s economy in “recovery mode” in the face of Covid-19, GDP growth is slowing. Worse yet, the world’s second-largest economy risks facing a stagflation scenario. Much like the one that took place in the United States in the 1970s.

It is not yet certain whether China will face a sluggish economy in the coming quarters. But if it does, it could impact Nio’s bottom line in the short term.

Along with a slowdown in China, a possible maelstrom in the US market could also lower it

Besides the risk of demand for its electric vehicles taking a hit, there is something else that could cause NIO’s stock to plummet. It would be a possible market sale. Certainly, I have argued in the past that changes in Fed policy would cause growth stock valuations to drop sharply. And yes, so far that hasn’t really happened.

However, with inflation remaining high, it is becoming increasingly difficult for the Fed to argue its “transitory” thesis. In fact, a Fed governor (Randal Quarles), although still in the “transitory inflation camp”, concedes that if the rise in prices continues until spring 2022, the take-off in interest rates could. have to happen sooner than expected.

What does the Fed’s policy have to do with Nio and the possible drops in its stock? If rates go up, it will cause the valuations of fast growing companies to fall. Why? Measured against future earnings, the present values ​​of growth stocks decrease as the discount rate increases.

It remains to be seen whether multiple cutbacks cause a large or small drop in NIO stock. Continued strong sales in China, as well as early positive results from Norway, could mitigate the blow.

Maybe a buy when weak, but avoid NIO stocks today

While strong growth always seems to be on the menu, major issues like a Chinese economic slowdown could threaten NIO. In addition, a rise in interest rates could also lower it. With that in mind, what’s the best move with Nio action right now?

If you’re optimistic about the long term, wait for his next bout of weakness. But as NIO stock is on the rise? Better to avoid.

At the date of publication, Thomas Niel did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.

Thomas Niel, contributor for InvestorPlace.com, has been writing individual equity analysis for online publications since 2016.


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