Why is NIO Stock Dropping So Much?

Key Points

• NIO shares were trading above $30 at the start of 2022, but as of this writing, the shares are just $11.17
• The main reason for the decrease in NIO stock is that politics are causing negative sentiment in the United States investors.
• NIO is a manufacturer of electric vehicles in China and is a competitor of Tesla.

NIO, Inc. (NYSE: NIO), a Chinese manufacturer of electric vehicles (EVs), is among the markets’ largest losers in 2022. Despite improved deliveries, the company has seen massive stock drops. And as investors price in what may turn out to be a more gloomy economic backdrop than initially believed, NIO’s stock is declining. 

It’s perplexing that NIO shares were trading above $30 at the start of 2022, but as of this writing, the shares are just $11.17.

So, why are the stocks of this top Chinese automaker falling? Let’s learn more about the falling NIO shares.

Coverage of NIO for Investors

NIO, founded in 2014 and headquartered in Shanghai, is a Chinese multinational automaker that produces exclusively electric vehicles. As an alternative to traditional charging stations, the firm is well-known for creating cutting-edge battery-swapping stations for its automobiles.

The company is regarded as the “Tesla of China.” However, unlike Tesla (TSLA), it collaborates with a state-owned carmaker to develop EVs instead of producing them independently.

NIO is the 854th most valuable business in the world, with a market valuation of $19.31 billion as of Nov. 12, 2022. NIO’s market cap was $96.57 billion as of Jan. 22, 2021. The current price of one share of NIO today is $11.17.

2020 to 2022 NIO Revenues

For Q3 ending June 30, 2022, NIO reported $1,827.8 million in revenue, an increase of 32.6% from last year’s third quarter.

A 122.3% increase from 2020 levels resulted in $5.670.6 million in annual revenue for NIO in 2021, while $2.491.6 million in yearly revenue for NIO in 2020 was a 107.8% increase from 2019 revenue.

Earnings Per Share

NIO’s net earnings or losses per diluted share base include convertible securities, loans, options, and warrants. Compared to the same period a year ago, NIO’s earnings per share increased by 257.14%, coming in at $-0.25 for the quarter ending June 30, 2022.

Earnings per share for the year ended June 30, 2022, were $-0.93, an increase of 4.49% from 2021. In 2021, the EPS was $-1.05, an increase of 43.84% from 2020. The company’s 2020 annual earnings per share were $-0.73, down 54.09% from 2019, and the annual EPS for 2019 was $-1.59, down 84.43% from 2018.

Recent Massive NIO Stocks Drops

NIO’s stock price has taken a beating over the years. But, we’ll focus on the most recent drops to give you a better idea of what’s going on.

On Oct. 14, 2022, NIO stocks closed at $11.75. From about a month prior (21 trading days), it had fallen more than 40%. This exceeded the roughly 12% loss in the S&P 500 index, suffering from steep stock price declines. Investors were left perplexed on Oct. 19, 2022, when the stock dropped to $10.92, marking a 7% decrease.

A string of negative economic news and reports that President Xi Jinping has tightened his hold on the country’s Communist Party pushed the NIO stock down. The stock’s share price temporarily dropped below $10 at its closing price on October 24th, 2022, and it reached a low of $8.38 that same day. 

By Oct. 27th, NIO stock had declined 10% within a five-day trading period and had lost nearly 42% of its value since September 27th. NIO stock continued to decrease until November 3rd, and then it increased by 17.5% on November, 4th, to reach $11.68. Since then, it has continually fluctuated.

Reasons Why NIO Stock is Falling

The collapse in NIO stocks is brought on by headwinds peculiar to China, but there might be other causes of the decline. Naturally, investors appear to be factoring some EV-related aspects into NIO stock, which also explains why NIO is dropping.

Zero Covid Policy

Chinese stocks as a whole are being severely devalued. The likelihood of future lockdowns and slower domestic growth in China is also significant. This is because any departure from the nation’s Zero Covid-19 Policy seems further away than some might have imagined following the Chinese Communist Party Congress. 

COVID control tactics in China have resulted in tight borders, mandated mass testing, intrusive digital surveillance, forced quarantines, and sudden lockdowns — often of entire cities — since the beginning of the epidemic. The strategy, according to Xi at the 20th Party Congress, is to put people and lives above all else.

Because the president made no indication to lift China’s strict COVID regulations anytime soon, most Chinese stocks, including NIO, may continue to decline. As President Xi solidifies his control over the second-largest economy in the world, news of dismal economic statistics out of China caused NIO and other Chinese technology companies to drop more than 10% overall. 

Shares of the two largest Chinese internet companies, Tencent and Alibaba, fell more than 11% after the closing. Baidu, a search engine, fell by 12%, and Meituan, a food delivery service, fell by more than 14%.

Geographical Unrest

Investors are wary of Xi’s objectives due to the possibility of further geopolitical unrest, which may have contributed to the decline of NIO and other Chinese companies. Following Russia’s invasion of Ukraine, the globe and, most crucially, investors, are more aware of the damage that war and other geopolitical upheavals may do. 

President Xi stated in the same speech at the 20th Communist Party Congress that he would keep applying pressure on Taiwan. China-U.S. ties, which have deteriorated drastically in recent years, revolve mainly around the issue of Taiwan. According to analysts, conflict danger has reportedly grown due to rising tensions over Taiwan. When Nancy Pelosi visited Taiwan on August 2, 2022, the stock market tanked.

Russia’s invasion of Ukraine has already proven that war can severely impact markets due to constricted supply chains. So, any new conflicts could worsen the state of the globalized world and cause further NIO stock drops.

Challenges in China’s Production and Supply Chains and a Slowing Growth in Auto Sales

The combination of poor sector growth and production issues is terrible news from the investor’s perspective. Problems with production are currently a concern for all EV firms. For example, due to logistical difficulties, Tesla said on October 16, 2022, that it would miss its 2022 delivery growth targets by 50%. 

Supply chain challenges, battery sourcing issues, cost increases, and logistical issues affect all EV companies. China’s surge in auto sales appears to be slowing down, with monthly sales growth reaching only 2.8% in September for the overall industry.

Underperformance in the High-Growth EV Stock and Projected Tesla Sales

Much fear around NIO stock in October 2022 stemmed from Tesla’s then-imminent earnings. Analysts anticipated decreasing growth, which would be caused by the aforementioned macro worries coming from China. 

Of course, Tesla, which manufactures a sizable portion of its fleet in Shanghai, will also slow down if China does. As a result, experts are confident that NIO will trade similarly to Tesla shortly. And, as a result of investors’ apparent decision to price in their fears before the report, TSLA stock is currently trading in a relatively narrow band. 

Despite this, many investors don’t wish to wait to ascertain how (perhaps) poor NIO’s results will be. Undoubtedly, many investors see the NIO stock as a higher-beta wager on the whole sector.

Constant Rise in Competition

Another factor contributing to the decline in NIO share prices is the firm’s growing rivalry with well-established Tesla and domestic producers like BYD, Xpeng, and Li Auto. China is producing electric vehicles and strengthening the industrial supply chain. 

In the first half of 2022, BYD Auto, supported by Warren Buffett’s Berkshire Hathaway, even outsold Elon Musk’s brand. That was due to a surge in hybrid and electric vehicle sales that overtook Tesla globally. 

Along with fierce competition from established markets, Mainland China has to contend with a slew of more recent competitors, like Yudo Auto, owned by the Juneyao Group, and Huawei. NIO vehicles compete with successful models like the BMW i4 and Mercedes EQS in Europe and the United States.

Could the Share Price Decrease Much More?

On September 7, 2022, NIO increased its second-quarter net losses to $0.25 per share. EV deliveries increased by 29.3% for Q3 2022 compared to Q3 2021, while revenue increased by 32.6% from Q3 2021, outpacing views. NIO delivered a record-breaking 31,607 automobiles in the third quarter of 2022, up 29% annually. Cumulative deliveries were 82,434 as of September 30, 2022 from Q1 2022. 

Given ongoing supply problems, the company’s forecast of 31,000 to 33,000 EV deliveries in the third quarter was met, which is better than anticipated. The EV company is currently debuting in several European nations, including Germany, the Netherlands, Sweden, and Denmark. That’s good news!

ET5, ET7, and EL7 are the three vehicles that will be available in these nations. Of course, this should accelerate growth, but analysts disagree. According to experts, NIO will report a net loss of possibly up to $2 billion. Companies that are not profitable are not particularly popular investments, for obvious reasons.

NIO’s third-quarter 2022 loss per American Depositary Share (ADS) was $0.36, up from $0.26 the year before due to higher operational expenses. On the plus side, though, revenue has increased for the year. As a result of the introduction of new models and the growth of international markets, they predict NIO’s losses will dramatically decrease to $0.29 in 2023, and revenue will increase by 81%.

Wrap Up

Given that it seems President Xi will hold onto power indefinitely and that the Chinese economy is still slowing down, investor sentiment in the United States is not good. However, remember that the mood in China was already dismal before the most recent Communist Congress happenings. 

As an investor, you might want to stay away from NIO stock unless there are definite signs of a turnaround in the political and economic situations. Be sure to do your homework and make the right investment decisions for your financial situation before buying in, no matter if it’s NIO stock or another company.

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The image featured at the top of this post is ©Andy Feng/Shutterstock.com.