In 2020, NIO (NYSE:NIO) stock soared. More recently, however, the shares have pulled back. Should I look to buy the dip or avoid NIO stock?
Electric vehicles for the green revolution
As a quick reminder, NIO is a Chinese electric vehicle (EV) business that targets the premium segment of the market. It looks to differentiate itself from other players with technological innovations such as battery swapping.
So what’s been happening with NIO shares then? Well, as I write, they’re trading for $20. At this time last year, the stock was trading for $38, which equates to a 47% decline over a 12-month period.
Looking as far back as January 2021, NIO stock was trading at all time highs of $67, which means the shares have fallen nearly 70% over an 18-month period.
The investment case for NIO stock
I believe that NIO stock has fallen for two primary reasons. These are macroeconomic headwinds and growth issues in China.
Macroeconomic headwinds currently affecting many businesses include soaring inflation, the rising cost of raw materials, as well as the supply chain crisis. All of these factors have played their part in pushing down NIO stock. When inflation soars, growth stocks such as NIO tend to be affected due to investors looking for safer investments. Supply chain issues, as well as rising costs, could have an impact on profitability.
Next, there has been a slowdown in economic growth in China, one of the world’s largest economies and a key market for NIO. It could see growth negatively affected, in turn, driving down investor sentiment.
On the other side of the coin, I believe NIO stock could recover and head in an upward direction. Sentiment and directives from governments to cut carbon emissions and move towards EVs are ramping up. Many vehicle manufacturers are committing to halting production of traditional petrol and diesel vehicles in the years ahead. This could bode well for EV sales and NIO.
My investment strategy has always been to buy and hold for the long term. For this reason, NIO stock looks an attractive prospect to me based on the fact it is a Chinese business with access to the Chinese market. China’s pollution levels are among the highest in the world. Despite current challenges, in the longer term, I believe NIO could dominate the market there, which could boost performance and returns.
Finally, as well as NIO’s technological advancements, it has diversified its business model. It has opened the NIO Life Store, which sells NIO-branded goods for consumers.
What I’m doing now
I’ve decided not to buy NIO shares for my holdings. For me, the negatives outweigh the positives currently. I am buoyed by certain aspects of NIO’s business such as its access to a potentially lucrative Chinese market, as well as its technological innovations.
The negatives noted above for me are also supplemented by competition as there are established vehicle manufacturers who will and have already entered the EV market. They already have an established presence, profile, and a brand following. Furthermore, NIO has not turned a profit yet and anticipates it won’t do so until at least 2024. Right now, NIO stock is one I will keep on my watch list.
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Jabran Khan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.