Should You Buy Nio Stock? 3 Pros, 3 Cons

Should investors buy Nio stock?

Investors in Nio Inc. (ticker: NIO), a Chinese electric vehicle maker, have had a bumpy ride, to say the least. Shares took a beating in 2021, dropping about 35%. Nio bulls see the sell-off as an opportunity to invest in the Chinese EV market at a discount, while bears still see plenty of uncertainty ahead for Nio in 2022. Nio will likely continue to experience extreme volatility as competition in the nascent global EV market heats up, but there’s no question that Nio has tremendous long-term upside potential. Here are three pros and three cons of investing in Nio stock.

Pro: Growth ahead.

Any investor buying Nio shares today likely sees the company’s impressive growth numbers and long-term growth outlook as the core of the bull thesis. In December, Nio reported 10,500 vehicle deliveries, up 50% from a year ago. Bank of America analyst Ming-Hsun Lee is projecting that Nio will grow revenue by 94.4% in fiscal 2022 and an additional 49.6% in fiscal 2023. Lee is also projecting 153,838 vehicle deliveries in 2022, up from 91,429 in 2021, or about 68% year-over-year growth. It’s easy to see why any investor would be excited about Nio’s growth.

Con: Regulatory uncertainty.

Chinese stocks faced pressures from regulators both in China and in the U.S. in 2021. In China, government regulators have cracked down on internet, fintech, gaming and education companies to rein in their power and growth. So far, Chinese auto stocks have eluded the wrath of Chinese regulators, but global investors are understandably trepidatious about what the Chinese government’s next move will be. In addition, the U.S. Securities and Exchange Commission recently finalized a new rule that would delist any Chinese stocks that don’t comply with strict new audit requirements, creating even more regulatory uncertainty for Nio investors.

Pro: Huge addressable market.

Technology market analyst firm Canalys projects that EVs will represent a third of China’s roughly 25 million annual car sales by 2025. That percentage equates to about 8.3 million EV sales in 2025, up from just 1.9 million projected sales in 2021. China has a track record of protecting domestic companies from international competition. However, Nio is expanding outside of China in 2022, including ventures into Norway and five other European countries. The sky is seemingly the limit if Nio is competitive in the global EV market. Wedbush recently estimated the worldwide EV market is a $5 trillion market opportunity.

Con: No profits … yet.

In the third quarter of 2021, Nio reported an $835.3 million net loss, up from a $587.2 million net loss in the second quarter. Even Bank of America, which has a “buy” rating and $66 price target for Nio stock, which closed at $29.30 on Jan. 9, is forecasting a $2.08 billion net loss in 2022. As interest rates continue to rise, it will become more expensive for unprofitable companies like Nio to borrow their capital needed to grow their businesses. Unprofitable EV stocks like Nio will need to prove to investors at some point that they have viable, profitable long-term business models.

Pro: New model launches.

One of the catalysts analysts expect to drive sales growth for Nio in the next two years is regular model launches. At its investor day event in January, Nio said it plans to deliver three new models based on its NT2.0 technology platform in 2022. The ET7 is a large luxury sedan intended to compete with Tesla Inc.’s (TSLA) Model S sedan. Management expects to hit 10,000 monthly deliveries of the ET5 midsize premium sedan in 2022, as well. Finally, management said it anticipates a third model launch in the second half of 2022 and at least three additional NT2.0 model launches in 2023.

Con: Steep valuation.

Even after its 2021 pullback, Nio has still been a top-performing stock overall in recent years. Investors buying the dip in Nio stock are still paying a more than 300% premium to the stock’s price two years ago. Nio is one of many stocks that have rallied on investor enthusiasm for EV investments. But at its current valuation, high expectations for future growth are likely already priced into shares. Nio stock currently trades at about 9 times sales and 12 times book value, steep premiums to the valuations of profitable legacy auto stocks like Ford Motor Co. (F) and General Motors Co. (GM).

Pros and cons of buying Nio stock:

Pro: Growth.

Con: Regulatory uncertainty.

Pro: Huge addressable market.

Con: No profits.

Pro: New model launches.

Con: Steep valuation.

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