There has been a lot of speculation lately regarding a growing bubble in the electric vehicle space. Chinese EV firm Nio (NYSE:NIO) has found itself at the center of the controversy. Nio has been touted as the “Tesla of China,” but the sheer number of EV makers crowding the Chinese market suggests that NIO stock could be just another wannabe.
Here’s Why a Nio Stock Test Drive Makes Sense
Investors are excited about electric vehicles for good reason — over the next decade, they’re expected to go from a niche offering to roughly 10% of the auto market. That kind of growth doesn’t come around often, so everyone is trying to get in early.
The trouble with that logic is that picking a winner, especially in China, can be risky. Still, that hasn’t stopped investors from flooding NIO stock over the past few weeks in hopes that it’ll rival Tesla (NASDAQ:TSLA) in a few years.
NIO Stock Drops on Earnings as Hype Fades
On Tuesday, the firm announced its second-quarter results and despite beating expectations on just about every imaginable metric, NIO stock dropped. That’s because it’s largely driven by hype and speculation, not fundamentals. For that reason, only the bravest should be considering scooping up NIO on the dip.
It’s not that NIO stock is all hype— there’s a buy case behind the stock’s recent run-up. The EV market in China is expected to be huge as the nation works to reduce its reliance on fossil fuels and switch to cleaner energy. The government’s commitment to boosting EV sales is a huge boon for Nio, as Beijing offers subsidies to EV makers.
That should help NIO compete with Tesla, whose exposure in China has increased significantly since the firm opened Giga Shanghai. TSLA is a force to be reckoned with, so government support is a crucial part of NIO’s potential growth story.
How Far Is Too Far?
While NIO certainly has a growth story, there’s reason to question whether or not the stock’s run-up is overdone. The glaring risk staring down NIO stock investors is Tesla, and whether or not Nio can compete against the brand in the long run.
Tesla has become well-known as the world’s premier electric vehicle maker and it will be difficult for newcomers like Nio to grab market share. But there are other issues plaguing NIO stock as well. Rising tension between the U.S. and China is one key risk that threatens Nio shareholders. While Nio does business in China and won’t be impacted by a trade war, Donald Trump’s threat to delist Chinese companies is worth keeping in mind.
Plus, after what happened at Luckin Coffee, investors have to take in to account the fact that Chinese firms aren’t subject to the same rigorous accounting audits as their American counterparts. That adds a layer of risk to any Chinese stock because investors can’t be sure of what they’re getting.
The Problem with Nio
Here’s the thing about NIO stock — a lot of the optimism surrounding the EV maker is baked in. At this point, it seems the firm is playing catch-up to its bumper rally. NIO made its way from $3 per share to $16 per share in just a few weeks. Since then the firm’s share price has been trading sideways waiting for another catalyst.
It’s hard to say with certainty if, or when, that catalyst will come. Buying NIO now is speculative, especially at current levels because NIO stock isn’t cheap.
The Bottom Line
EV stocks, look played out right now and I’d suggest only aggressive investors comfortable with a high degree of risk pick up stocks from that sector right now. The upside for NIO stock investors simply isn’t worth the level of risk the stock is carrying, and for that reason, I’d remain on the sidelines.