Insights

Why Nio Stock Is Sinking Further Today

What happened

After a steep fall Thursday, shares of Nio (NYSE: NIO) were down another 4.8% as of noon ET Friday.

Investors are displeased with the electric vehicle (EV) maker’s latest quarterly numbers, analysts are slashing their price targets on its stock, and, more broadly, growth stocks are tumbling Friday on news that U.S. inflation just hit a 40-year high in May.

So what

The inflation news is particularly bad for growth stocks like Nio, as both high inflation and the higher interest rates with which the Federal Reserve will fight it increase the cost of doing business, making it more difficult for those companies to grow.

Multiple analysts downgraded Nio following its disappointing first-quarter earnings release Thursday.

Tim Hsiao of Morgan Stanley cut his price target on Nio stock from $34 a share to $31 per share because of the EV company’s lower margins.

Nio reported lower vehicle margins and gross margins for the quarter, and management blamed two factors in particular: higher battery costs and lower average realized selling prices for its vehicles.

Mizuho Securities analyst Vijay Rakesh also slashed his price target on Nio Friday morning, although at $55 per share, it’s still significantly higher than what Morgan Stanley’s Hsiao is targeting.

Now what

Perhaps what concerned investors more than Nio’s Q1 numbers was management’s outlook for the second quarter: The company expects vehicle deliveries to rise by 5% to 14% year over year to between 23,000 and 25,000 vehicles, and anticipates revenue growth in the 10.6% to 19.4% range. Although that means Nio will continue to grow, investors were expecting a faster pace of growth given how intensely competitive the EV industry is becoming.

Nio’s stock, though, might not have fallen as much as it did on Friday had it not been for the broader market sell-off. Its growth plans are intact and, in fact, looking bigger than ever. I’d even call this dip in Nio’s stock price a great buying opportunity for investors looking to add EV sector exposure to their portfolios.

For example, Nio expects its vehicle margins will bounce back in the third quarter, will start selling two new EV models in the coming months, and has already set a date — in late 2024 — for when it plans to start selling an affordable mass-market EV priced between $30,000 and $45,000.

That’s not all: This mass-market EV will run on Nio’s in-house battery packs, which it will start manufacturing in 2024. Batteries are the most important component of an EV, and building them in-house will be a crucial step for Nio on its path to becoming self-reliant and producing EVs cost effectively and at scale. And on Friday, Nio announced plans to build an industrial park for the manufacture of EV parts in a bid to bring its production base and parts supply chain closer.

There’s a lot to like about Nio for long-term investors.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nio Inc. The Motley Fool has a disclosure policy.

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