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NIO Stock Investors: Watch Out for These Risk Factors

Mohit Oberoi, CFA - Author

Jul. 24 2020, Updated 11:36 a.m. ET

  • So far, NIO stock has rallied 244% in 2020. However, investors need to watch out for the risk factors after the sharp rise.
  • Tesla stock has also risen 257% this year. Investors’ appetite for the EV (electric vehicle) story has catapulted EV producers and ancillary EV plays to new highs.
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NIO stock

While NIO (NYSE:NIO) stock fell in the first quarter, it has been on an uptrend since then. Last month, Goldman Sachs downgraded the stock after its sharp rally. Goldman Sachs also downgraded Tesla (NASDAQ:TSLA) stock. Given the euphoria over EVs, investors don’t seem to care much about analysts’ downgrade. In general, analysts have been pessimistic about EV stocks. Tesla has mainly traded above its mean consensus target price since October 2019. NIO is also trading way above its mean consensus target price.

Last week, I noted that after the rally in NIO stock, it would be prudent to sell it and book profits. While the EV story is real, it looks like fear of missing out trade and a bubble. We’ll discuss some of the potential risks in NIO stock. 

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NIO has too much debt on its balance sheet

NIO has been grappling with a lot of debt on its balance sheet. At the end of the first quarter, the company had around $1.5 billion in debt. Given the company’s current loss-making operations, the balance sheet looks stretched. However, as I noted in a previous article, NIO should consider ADS (American Depository Share) issuance, which could help lower its debt burden.

Execution risk

While markets price EV stocks like NIO and Tesla for perfect execution, they still face execution risk. NIO has to deliver on its vehicle gross profit margin. Notably, the vehicle gross profit margin could rise to double digits by the end of the year. The company’s vehicle gross margin was negative in the first quarter.

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Competition risk

EV stocks also face competition risk as mainstream automakers ramp up their EV portfolio. So far, legacy automakers haven’t had much success in the EV space. However, they have doubled down on their EV plans. Legacy automakers should be a formidable competitor for pure-play EV companies soon. While Tesla’s valuations suggest that mainstream automakers have little chance to succeed in the EV industry, the prophecy looks farfetched.

Soaring valuations, a possible bubble in NIO and Tesla

NIO stock has risen almost 80% in July. The stock has been on an uptrend after posting better-than-expected second-quarter deliveries. Other EV stocks have also rallied. For now, investors don’t seem to be concerned about the soaring valuations. After the fundamentals catch up with EV stocks, they will likely come under pressure.

There doesn’t seem to be a near-term trigger for the sell-off in EV stocks even though investors can sense a bubble.

There also seems to be fear of missing out trade in NIO stock. Investors seem to be buying every dip. While the EV story shows good long-term potential, I would be apprehensive about buying the stock at current prices. Read How Does NIO Stock’s Valuations Look after the Surge? to learn more.


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