As electric vehicles continue to widely proliferate in China and Tesla (NASDAQ:TSLA) appears to be losing its momentum in the Asian country, Nio (NYSE:NIO) stock certainly has a great opportunity.
The company can radically boost its top and bottom in the medium and long term. Also positively for Nio stock and its owners, the company looks poised to expand to Europe, which is another huge EV market.
But in both China and Europe, despite Tesla’s difficulties, Nio is still facing increasingly tough competition. Also likely to weigh on the company’s performance for some time is the semiconductor shortage. And Nio’s recent results do indicate that these negative catalysts are already having an impact on the company’s business.
Nio’s Big Opportunities
China’s EV sector is booming and has seen “explosive growth,” CNBC recently reported. Further, Chinese consumers are looking for EVs from companies not named Tesla, fund manager Jian Shi Cortesi said, according to the financial news outlet.
Indeed, Elon Musk’s auto company hit a major speed bump in China last month. Its deliveries of EVs made in its Shanghai factory fell 27% versus the previous month to 25,845. According to the South China Morning Post, the decline came as Tesla faced “a social media backlash from Chinese customers last month over safety and quality issues.”
In 2020, Tesla’s Model 3 was the best-selling EV in China, so the company’s stumble would seem to gives Nio a big opportunity to gain share in the sector.
Meanwhile, Nio has hired salespeople to target Europe, which is the world’s largest EV market. The continent should be very fertile ground for the automaker, which has been quite successful in China.
Finally, InvestorPlace columnist Louis Navellier says that Beijing’s recent embrace of battery swapping (the government recently issued extensive battery-swapping regulations) should make Nio’s well-established battery-swapping service more popular.
Nio’s Tough Threats
Conversely, though, the Chinese automaker has some problems. Not least among them is that two new popular EVs have recently arrived in the Chinese market.
Wuling Hongguang Mini EV, a small EV made by General Motors’ (NYSE:GM) joint venture in China, has sold very well in the Asian country since it was launched last July. Specifically, 112,000 of them were sold in 2020. Although the $4,500 EVs may not, for the most part, directly compete with Nio’s high-end vehicles, GM’s joint venture has already unveiled more upscale versions of its Mini EV. The latter vehicles could be stripping some market share from Nio.
Presenting even bigger challenges to Nio, China’s largest automaker, Geely, is starting to sell a high-end EV in China and Ford (NYSE:F) is beginning to market its new Mustang Mach-E crossover EV there. And as I noted in previous columns, the sales of EV start-up Xpeng (NYSE:XPEV) are growing rapidly, while reviews of its EVs have been strong.
Finally, Nio recently said that the company’s supply chain is still facing “significant challenges due to the semiconductor shortage.”
Those challenges, in tandem with the steepening competition in China, likely caused the company’s Q1 bottom line and deliveries to come in below analysts’ average estimates. Further, the automaker expects is top line to only increase 2% to 6.5% this quarter. With Nio stock still changing hands for nearly 13x the company’s sales over the last 12 months, that’s not very impressive at all.
The Bottom Line on Nio Stock
Given Nio’s steep challenges and the high valuation of its shares, I think the stock’s risk-reward ratio is negative at this point. As a result, I recommend avoiding the shares for now and selling them if you own them.
Two better options in the consumer EV sector are GM and Xpeng. GM’s recent results showed that it’s navigating the chip shortage quite well, and it has an impressive array of EVs coming out in the coming months and years. Xpeng’s strong technology gives it a better moat against competition than Nio, I believe.
On the date of publication, Larry Ramer held a LONG position in GM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.