Despite the long-term bearish trends for stocks based in China, Nio (NYSE:NIO) stock has the best prospects.
This is due to the heightening regulatory pressures from the Chinese Communist Party that hurt technology stocks in the last year. The U.S. and China trade war is not helping things, either, as tensions worsen. In addition to tariffs, the U.S. government is now banning imports from China’s Xinjiang region, citing human rights.
As a shining electric vehicle growth story, the macroeconomic headlines hurt Nio stock. Shareholders need to consider the new product announcement, expansion plans, and green funding ahead.
ET7 Failed to Lift Nio Stock
In July and August 2021, Nio completed the ET7 winter and summer testing, respectively. The company started the road test in Shanghai and ended in Lhasa. The harsh conditions, which include a thin atmosphere and a rough terrain, would validate the ET7’s build quality and performance. The EV does not sacrifice luxury, either. It has air suspension as a standard feature, which will give owners a smooth ride.
The ET7’s acceleration did not disappoint in the high-altitude environment. Nio tested the braking, steering, cooling and heating, and power cell systems. It noted no issues that would delay its future delivery.
Shares of Nio slumped since the company completed vehicle testing. The stock failed to break out above $55 in July 2021. Instead, bears, who have a short float of under 5% on the stock, sold shares every time shares touched the 200-day moving average.
Expansion Plans
This year, Nio will enter four European markets. Its expansion into Germany, the Netherlands, Sweden and Denmark will lower the stock’s geographical risks in its home territory. China’s gross domestic product growth is slowing. The government has a zero-Covid policy that is hurting output. It also temporarily shut down mining activity ahead of the Olympics scheduled for February.
China also faces an induced real estate slowdown. This will hurt domestic demand as income levels drop. Sales of Nio’s premium vehicles could slow in China. Europe is a rich market that will welcome the introduction of Nio’s EV line-up.
Green Funding
The U.S. government’s “Green Tidal Wave” lifted clean energy stocks around a year ago. The country’s commitment to invest in clean energy solutions will not end. Investors will consider Chinese EV stocks that include Nio as a green play.
Although China’s GDP growth is slowing, the government does not want the world to look at it as a polluter. It will continue to offer a tax rebate until 2023 for EV buyers.
Governments will also react to higher oil and natural gas prices today. They will feel the pressure of introducing spending bills to accelerate EV charging stations and battery development.
Fair Value
In a five-year discounted cash flow revenue exit model, investors may assume a conservative terminal revenue multiple of 2.5.
| Metrics | Range | Conclusion |
| Discount rate | 10.5% – 9% | 10% |
| Terminal revenue multiple | 2.0x – 2.8x | 2.5x |
| Fair value | $37.19 – $51.14 | $45.09 |
Model courtesy of Finbox
The model assumes that Nio’s annual revenue will peak at 100% year-over-year. By the fiscal year 2025, revenue will grow by a modest 35%. Nio may offset those bearish forecasts by expanding sales globally. Investors must watch for the company’s capital expenditure growth associated with the global launch.
Nio’s cost growth cannot exceed revenue growth for too long. EV investors are becoming less tolerant of companies reporting losses every quarter for the promise of future profitability.
Valuation Risk
Markets are growing cautious on companies that have no profits. Nio’s value score, according to Stockrover, is 6/100.
Investors may consider XPeng (NYSE:XPEV), another EV manufacturer whose market capitalization is lower than that of Nio. This suggests that EV investors pay less attention to XPEV stock. Li Auto (NASDAQ:LI) also trades at a lower comparable market cap.
Punitive regulations hurting many of China’s industries are a major risk for Nio stock. The government may encourage investment in clean energy that excludes EV firms. China may treat Nio’s vehicles as a luxury good. It may discourage Chinese consumers from buying them. This would slow Nio’s sales.
Fortunately, Nio posted deliveries of 10,489 vehicles in December 2021. This is down from the 80,940 vehicles in November 2021. Cumulative deliveries as of Dec. 31 reached 167,070 units.
Your Takeaway
Nio remains a fundamentally strong company. It has a clear vision of its global growth strategy. It did not slow its product release schedule, either. As consumer demand for Nio’s latest models grows, the stock has a good chance of outperforming the EV market this year.
Markets are pricing China’s potential regulatory risks before it happens. If the country introduces tax rebates to help the industry, Nio shares will rebound.
On the date of publication, Chris Lau did not have (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.
