Nio Stock’s Slide Likely Isn’t Over as Broader Correction Looms

Stocks to sell

When I wrote about Nio (NYSE:NIO) last month, I argued that the risks that could send NIO stock lower outweighed factors that could help it bounce back.

NIO stock: A shot from the outside of a Nio display room at night.

Source: Robert Way / Shutterstock.com

The Chinese electric vehicle (EV) maker has numerous strengths, such as high projected rates of growth in its home market. It also has the potential to go global, first in Europe, and then possibly in other key markets like the United States.

However, I believe the company’s rich valuation and jurisdictional risk from China outweigh these positives. What’s more, the stock has taken a hit on concerns about the potential collapse of Chinese property development giant Evergrande (OTCMKTS:EGRNF).

In my opinion, NIO stock is nowhere near bottoming out and likely to move lower in the short term.

High Growth Far From Guaranteed

While NIO stock is down 47% from its all-time high of just below $67 per share, made in January, there’s still a good deal of enthusiasm surrounding the company.

The main driver of that enthusiasm is the company’s high projected levels of growth. Analysts forecast revenue will surge 120% this year and 65% in 2022.

Depending on how Nio’s expansion into Norway goes, growth from Europe could cause analysts to raise their growth forecasts. This could also help counter a growth slowdown in China. Nio faces stiff competition in the Chinese EV market from local rivals such as Xpeng (NYSE:XPEV), as well as from the likes of Tesla (NASDAQ:TSLA).

Despite the high-growth forecast, I do not expect sentiment for NIO stock to shift back to prior levels of bullishness for two reasons.

First, it’s not guaranteed that the company’s rate of growth will stay as high as it’s been in recent quarters. The global chip shortage resulted in Nio’s August vehicle deliveries falling by 25.9% on a month-over-month basis and caused management to cut its delivery outlook for the current quarter (ending Sept. 30). With the chip shortage expected to drag on, it may affect results in subsequent quarters as well. A Chinese economic slowdown, even if the Evergrande crisis gets under control, could also negatively affect sales growth going forward.

Second, the company’s European expansion could fail to deliver. If Nio stumbles in Norway, it may signal it doesn’t have what it takes to become a global EV brand.

Given these two big unknowns, I don’t see much to prevent NIO stock from tumbling if the broader market turns lower.

Downside Risk High if Appetite for Growth Stocks Wanes

With the odds of a correction climbing, it may be best to tread carefully with growth stocks. Whether caused by changes in Federal Reserve policy, or factors like slowing economic growth, it seems all the more likely that the runaway bull market is about to reverse course.

In the event of a broader market pullback or correction, investors will shift out of speculative growth plays like NIO stock and into safer plays. This is likely to be the case even if the company meets expectations.

If Nio faces the double-whammy of disappointing results and a rocky stock market, look out below. While shares probably won’t head back to the low single-digits, investors can expect an outsized pullback compared to the broader market.

The Bottom Line on NOI Stock

Hopes for this popular EV maker run high, but the ongoing chip shortage and a slowing Chinese economy may stop Nio’s revenue growth in its tracks. And the risk of a pullback is being exacerbated by a weakening broader market.

I think there is a high probability that NIO stock trades back down to $25, or even $20 per share. So, it’s best to stay away for now.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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