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Nio’s (NYSE:NIO) recent share price performance has been hugely disappointing. The electric vehicle (EV) manufacturer’s 20% stock price fall since the start of the year means it has underperformed the FTSE 100’s 8% rise and the S&P 500’s 13% surge.

A key reason for its decline is a global shortage of semiconductor chips. This is limiting production across the automotive industry and caused disruption to the company’s production in the current quarter.

Growth opportunities for NIO

Still, Nio delivered 6,711 vehicles in May 2021. This represents a 95% year-on-year rise. It is also on target to deliver 21,000-22,000 vehicles in the second quarter of 2021, which would be more than twice the figure from the same period of the previous year.

The firm’s rising supply of premium EVs is likely to occur in tandem with increased consumer demand. Regulatory changes across major markets such as Europe, China and the US, alongside evolving environmental concerns among consumers, mean that EV market share of the automotive industry is widely forecast to rise.

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For example, EVs currently have a 7% share of the light-vehicle market in China and Europe, while they have a 3% market share in the US. By 2030, EVs are expected to make up over 37% of light-vehicle sales in China, more than 33% of sales in Europe and at least 17% of light-vehicle sales in the US. As such, Nio is likely to enjoy rising demand for its products over the long run.

Nio’s strategy could aid its prospects of meeting rising demand. Previously, it has been focused on its domestic market of China. However, it recently expanded into Norway, which has the highest EV market penetration per capita in the world. The firm plans to further grow its presence in Europe, which recently overtook China to become the largest EV market in the world.

Nio is also seeking to differentiate itself within an increasingly competitive market. Its premium products, rising investment in research and development and emphasis on customer service could provide it with a relatively wide economic moat.

Potential threats

However, the company’s growth plans could be constrained by a rise in supply of EVs from other manufacturers. Indeed, 90% of the world’s 20 largest automotive manufacturers by volume intend to rapidly increase their range of EVs over the next decade.

Established brands may have a competitive advantage over their peers due to existing, and longstanding, customer relationships. As such, they may remain dominant brands in the global automotive industry as battery costs decline and consumer take-up increases.

In addition, Nio’s valuation suggests it lacks a wide margin of safety even after its recent share price decline. It trades on a price-to-sales multiple of 9.7 using 2021 forecast revenue, which falls to 6 when using 2022’s revenue estimate. The firm is expected to remain loss-making over the next two financial years.

Investment prospects

Overall, the EV industry is likely to experience rapid growth over the next decade as regulatory changes and evolving consumer tastes spur demand for cleaner forms of transportation. Nio seems to be well placed to capitalise on this positive outlook.

However, its high valuation and strong competition from existing automotive manufacturers mean that it continues to offer a relatively unfavourable risk/reward opportunity. As such, a further share price fall may be required to increase its investment appeal.

Related

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Robert Stephens

Robert Stephens

Robert Stephens is a CFA Charterholder who has around 15 years’ experience working in the financial services industry.

The vast majority of that time has been spent working as an Equity Analyst, with a focus on FTSE 350 shares in the consumer goods, consumer services and retail sectors.

He has also contributed to a wide variety of media publications on a freelance basis, including The Telegraph, What Investment, Master Investor and Citywire.

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