3 Reasons Investors Should Not Hope for a Comeback in Nio Stock

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Government incentives and shifts in consumer preferences have guided the momentous rise in NIO (NYSE:NIO) stock over the past several years. Nio’s revenue exceeded $7.8 billion for FY2023, but it’s losing its spark.

A beleaguered economy in China coupled with intense competition have made it hard for the smaller EV maker to not just grow sales significantly, but it has also been difficult to improve profitability and margins. NIO stock has dropped 55% in the past year, and the outlook is unfavorable.

Competitive Risks Remain Despite Delivery Record

In the beginning of June, there was a lot of investor noise about NIO’s May deliveries. According to a press statement, NIO delivered 20,544 vehicles that month, which represented a large year-over-year increase of 233.8%.

The Chinese EV maker also noted, “the deliveries consisted of 12,164 premium smart electric SUVs, and 8,380 premium smart electric sedans.”

As of the end of May, NIO’s cumulative deliveries figure stands at 515,811. NIO’s SUVs, which include the ES6, ES7, and ES8 models, appear to be the carmaker’s most popular vehicles.

A year’s worth of data point to the fact that NIO’s SUV deliveries have, by and large, stayed ahead of sedan deliveries.

Despite these impressive numbers, investors should not get too sidetracked here. The largest players in the Chinese market are still BYD (OTCMKTS:BYDDY), Li Auto (NASDAQ:LI), and Tesla (NASDAQ:TSLA), all of which command a larger market share and are intent in growing it.

Consumer electronics giant Xiaomi (OTCMKTS:XIACY) is a recent entrant into the market that should make NIO uncomfortable.

Xiaomi began delivering its electric SU7 sedan in April with, 7000 deliveries, and May figures jumped 22% sequentially to 8,630 delivered vehicles.

The reality is that’s not too far from where Nio’s monthly deliveries are, and it is quite possible Xiaomi catches up especially as the company substantially expands production.

Nio’s Avoidance of “Price Wars” Could Hurt It

The intense competition going on in China’s EV market has resulted in a hotly contested bout of price warring.

In a May article, Hong Kong-based newspaper the South China Morning Post provided context, asserting, “BYD, the world’s largest EV builder, fired the first salvo in the price war in February, slashing the prices of nearly all of its cars by 5 to 20 percent to accelerate a transition from petrol vehicles to electric cars on the mainland.”

However, Nio has, thus far, refused to engage in the ongoing price wars. In particular, CEO and founder William Li said to the press, “We will keep prices stable.”

It’s good to stop here and note, Nio does largely play in the upper-end segment of the car market with prices that are above 300,000 yuan or ~$41,250.

Not being willing to cut prices makes sense from a business standpoint for NIO, but as other large EV makers with well-built and sleek vehicles cut prices, NIO could face even more competitive pressure and perhaps even lose out on medium- and long-term growth.

Tariffs Could Hurt Nio Stock

Tensions between China and the United States have been brewing since the Trump Administration began a trade war many years ago. The current Biden administration has largely kept that geopolitical posture intact.

Despite all the rhetoric about the need to safeguard the climate, in May, the administration announced a new array of tariffs on different kinds of Chinese goods, most notably Chinese-made solar cells and electric vehicles.

In particular, the White House imposed a 100% tariff on Chinese EVs. The European Union appears to be following suit here, introducing provisional tariffs of up to 38% tariffs on Chinese EVs.

Nio has regarded the EU as an important international market and said back in May that the EV maker would pursue its European expansion strategy despite tariff risks.

Nio could be most at risk here because its vehicles compete with BMW’s X5 and Audi’s Q7 in terms of price range, while BYD and other EV makers are making cars that would still be cheaper in price even with the tariffs in place.

On the date of publication, Tyrik Torres did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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