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NIO Stock: Outlier to China’s Regulatory Crackdown

In 2014, Nio (NIO) entered the electric vehicle market with its “New-gen Smart Vehicles.” This Shanghai-based automobile manufacturer went public on the NYSE in 2018 under the ticker symbol NIO. Today, it is a leading electric vehicle manufacturer in China. 

NIO stock soared to fresh all-time highs in late-January, rising to nearly $62 per share. Indeed, investors looking for Tesla (TSLA) -like growth have sought out smaller EV players as long-term bets. In this light, NIO stock has been one that continues to be a favorite among investors.

See Top Smart Score Stocks on TipRanks >>

Touted as the “Tesla of China,” Nio is a hyper-growth stock with the blessing of the CCP (Chinese Communist Party). Unlike Tesla, which carries various risks in China as a U.S. company during this time of strife between the U.S. and China, Nio is the golden child for the CCP in promoting a green and innovative future.

I’m bullish on Nio’s long-term prospects, relative to rivals such as Tesla, and I think this stock is a great long-term holding for investors. Let’s dive into a few reasons why this is the case. (See Nio stock charts on TipRanks)

China’s Crackdown on Tech Stocks

The Chinese Government has been busy passing specific pieces of legislation this past year. A shift in focus among Chinese government officials toward curbing monopolistic practices and ensuring common prosperity for all, rather than the prosperity of those with capital, has driven this view.

Additionally, new data protection laws directly affect on EV makers like Nio. The idea is to make the use of personal data stricter and to eradicate illegal online activity. As NIO is listed on the U.S. exchange, it is among the companies that have to undergo cybersecurity reviews.  Didi Global (DIDI), which is listed on NYSE, was hit hard due to this review, as it had to stop user registration. Even Alibaba (BABA), one of the largest Chinese tech companies, has lost hundreds of billions in market cap via this crackdown. 

The Chinese Communist Party (CCP) has a five-year plan that it sees as the gateway to growth. By increasing regulations, the CCP hopes to provide firmer guidance for the economy’s direction.

Of course, for investors putting their capital to work in various tech stocks, these regulations are not a good thing. The whole concept of capitalism is built on the idea that growth can be limitless. When a government starts capping how much individual companies can make, folks stop investing.

For hyper-growth play Nio, this has certainly been the case in recent months. While the CCP hasn’t directly targeted Nio with regulatory sanctions, investors are pricing in a greater risk of “voluntary” profit sharing that companies may be forced enact to appease the CCP.

That said, Nio’s positioning as the poster child for the EV revolution in China provides a unique opportunity for investors. Indeed, China is unlikely to want to slaughter its golden geese. Rather, right now, it seems to be harvesting some eggs. For those with this kind of long-term view, Nio can be seen as a relatively safe investment in the Chinese tech space long-term.

Why are Some Investors Still Bullish on NIO Stock?

In addition to Nio’s position as a rallying cry for Chinese regulators touting a strong stock market, there are other key reasons investors like Nio right now.

For starters, the Chinese EV market is absolutely massive. Not only is the Chinese EV market the largest in the world, it’s outpacing its major economic peers in terms of the growth rate in this sector.

This growth has been reflected in Nio’s recent quarterly results. The company posted an outstanding Q2 performance on both its top and bottom line. The company delivered triple-digit growth in terms of deliveries. Demand for the company’s luxury electric SUVs boomed, reflected in a 112% growth rate year-over-year.

This translated into revenue growth of 145% on a year-over-year basis for NIO, hitting $1.3 billion. Nio is still losing money – the company lost $0.03 per share this past quarter. However, analysts were expecting a loss of $0.09 per share, an improvement from a loss of $0.17 per share the same quarter the year prior.

Additionally, Nio expects this coming quarter to be even better, despite the global chip shortage and other constraints hitting this sector. The company has put forward a plan to see deliveries increase to 25,000, with revenue of $1.38-$1.49 billion.

Accordingly, from a fundamentals perspective, there’s a lot to like about Nio’s growth trajectory. Investors expect huge benefits as Nio works on its goal to be a global leader in EVs and expands into Norway. Electric vehicles have dominated Norway’s markets, and Nio is going to capitalize on that.

At the moment, Tesla is the leading name in Norway, but with Nio’s ES8 launch in the country, there’s likely to be a shift in the race for market share. 

What are Analysts Saying about NIO Stock?

As per the TipRanks’ analysts rating consensus, Nio is a Strong Buy. Out of 7 analyst ratings, there are 7 Buy recommendations.

This stock has an average NIO price target of $62.44, implying an upside of 74.3%. Analyst price targets range from a high of $72 per share to a low of $47 per share. 

Bottom Line

While stating that Nio will have a bright future, it’s important not to suggest that the recent political and regulatory curbs are irrelevant. This regulatory environment will likely continue to have negative consequences for Chinese tech stocks.

That said, there’s reason to remain bullish on Nio. This is an EV company with a growth trajectory unlike any EV maker out there right now. Accordingly, those looking for Tesla-like returns may want to look at the Tesla of China right now.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article.

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