NIO Stock: Concerns Are Overblown (NYSE:NIO)

Lately fear has gripped the general market, causing investors to flee to safety away from perceived risky tech stocks such as NIO Inc. (NIO). When combined with the negative sentiment toward China, it has resulted in the EV maker to take a big hit on its share price.

In this article I want to show why the fears are way overblown, and the best way to play NIO under the current market conditions.

Macroeconomic concerns

Lately, the biggest concern for investors has been the change in policy of the Federal Reserve in regard to inflation, where it is now believed it’ll stick around longer than originally anticipated.

Under current market conditions, it is expected the Fed will raise interest rates anywhere from two to four times in 2022, ending the year at 0.75% to 1.00%. While that’s highly probable as to how it’ll work out, it remains to be seen whether or not inflation will remain high throughout the year. If it starts to drop, rate hikes would probably be modest in comparison to current expectations.

When and how much it’ll tighten is another factor weighing on the market because of the potential to lose some of the growth momentum that has been driving the U.S. economy for years.

I believe this is generating most concerns about risk for investors, and while a boost in interest rates is already being priced in, there is still a lack of clarity on the part of the Federal Reserve on how it’ll play out. This has sector rotation and transfer of capital to perceived safer holdings.

As it relates to NIO, it of course has taken a hit from this like the majority of tech stocks have. I think once the market knows the actions the Fed plan on taking, it’ll reduce fears, removing a lot of the downward pressure.

In this area I see the market overreacting to what amounts to a potentially modest boost in interest rates, which is unlikely to have much of an effect on the performance of tech companies.

China fears

Without a doubt the main issue used to generate much of the fear in regard to China is the DiDi Chuxing (DIDI) delisting. It’s been repeated so many times that readers or viewers take for granted it’s some type of proxy for the entirety of the Chinese companies listed in the U.S.

Initially it was a legitimate concern because investors were not only blindsided by the decision from Beijing to reverse the listing, but also more importantly, it created a lot of uncertainty as to what the Chinese government would do next.

Much of that was alleviated when the China Securities Regulatory Commission released a statement clarifying its position concerning VIEs and the parameters Chinese companies would be expected to cooperate with under that structure.

With the VIE structure being retained and the Chinese government removing “limitations on foreign investment in auto manufacturing,” the Chinese auto sector should continue to grow tremendously in the years ahead, with NIO leading the way.

Some have even pointed out China cutting back on EV subsidies by 30 percent this year as being a headwind for NIO. In reality, it’s actually a tailwind, as the subsidy being reduced affects cars under the price of $42,000. NIO’s cars are, for the most part, higher priced than that, so it’ll be a competitive advantage for NIO. Those citing this as a negative simply aren’t doing their homework.

The bottom line concerning delisting fears is it’s highly unlikely this is how it’ll play out with NIO, and most other Chinese companies listed in the U.S.

HFCAA fears

Another concern weighing on some investors concerning China-based companies is HFCAA. It is believed to be a major threat because if America does take a hardline stance on it, many Chinese companies would probably stand against it and get delisted rather than comply; at least that is what the market thinks at this time.

First, if it is pursued in a rigorous way by the SEC, it won’t have any effect until the start of 2024 at the earliest. It could take much longer. Two years from now is a lifetime away with a growth company like NIO, and even if it is forced to make a decision, by then many investors will have taken significant profits off the table. It’ll be easy to remove risk by selling shares if and when it becomes an issue. The key there will be to sell before the market starts to panic in anticipation of a potential delisting.

I don’t think the U.S. is going to be stronghanded in this, and by time 2024 comes around, a lot of things could change with HFCAA. This should be the least of investor worries concerning NIO.

Latest positive catalysts

A positive catalyst that will help NIO going forward is the decision by the People’s Bank of China to lower its interest rates for the second time in a month. On December 20 it lowered rates by five basis points, and on January 20, it lowered it by 10 basis points, from 3.8% to 3.7%.

The five-year LPR was also cut from 4.65% to 4.6% – April 20 was the last time it was downwardly adjusted.

It’s interesting at the time the Fed is moving to raise rates, China is doing the opposite. That will be a tailwind for the Chinese tech sector.

This is on top of the upcoming launch of production for its ET7 electric sedan on March 11, and a significant increase in delivery for its other models for 2022. And it’s also very probable the company will be turning a profit by the end of the year.

How to trade NIO and mitigate risk

The first thing to consider is this. If you’re terrified of taking a position in NIO, then the obvious conclusion is to not take a position. That’s simple enough.

That said, many investors understand that the current share price of NIO is an extraordinary entry point that may not be available for long. So, they’re battling it out within themselves between the fear of Chinese authorities as a result of media hype, and the FOMO associated with the potential growth inherent in NIO’s business model and its rapidly improving fundamentals.

For those that want to take a position in NIO, there are two things to think about. The first is dollar cost averaging, and second is managing position size; both work together to lower risk significantly.

The first thing to do is determine how much you’re willing to risk based upon the size of your trading account, and second would be to divide that by the period of time you want to invest in the company.

For example, if you want to spend $1,000, you could spend $250 over a four-month period to take advantage of the volatility of the stock, ending up with a acceptable cost basis. That way you cover yourself on the size of the risk you want to take, as well as getting in at a cost basis you’re comfortable with.

You could of course just take whatever you decide to invest and take a position at once if you believe the share price is at a good entry point. Either way, the most important decision is in regard to position sizing; the rest is what strategy you want to use if taking a position.

Like I mentioned, for some, if you’re convinced the chance of NIO being delisted is high, then simply don’t take a position. But if like me, you believe it’s very improbable that Chinese authorities will take those steps, then it could be one of the best opportunities to grab some shares at these prices.

Again, dollar cost averaging will help on the entry point if the share price ends up falling even more.

For myself, I do have a position in NIO, and consider it a good, but not great, cost basis. But I’m still not going to break my discipline by giving into the temptation to add to my position size.

That doesn’t mean I won’t do it, but the share price would have to drop further for me to subject my account to further risk. If it does take another significant downward hit, my risk lowers along with the share price of NIO.

Conclusion

Keep in mind that in the eyes of media, if it ‘bleeds it leads’ is a practice that attracts many viewers or readers to their platforms, and pointing out things that generate fear and concern is a key way they maintain and/or increase the number of people engaging with their content. Investors need to understand that reality when consuming media that could have an effect on investing decisions.

There’s a lot more to NIO than covered in this article, but my thesis is the fear of NIO being delisted by Chinese authorities isn’t based on fact, but on media outlets and commentators attempting to tie uncorrelated events, like the one associated with DiDi Chuxing, into the inevitable outcome for NIO.

The consequence is many investors are no longer looking at the solid growth trajectory NIO has before it this year and in the years to come, and instead are focusing primarily on fear of Chinese authorities delisting the company, and the actions the Federal Reserve plans to take in 2022.

I think that’s going to change as NIO starts reporting the soaring number of vehicle deliveries in 2022, along with the growing number of places owners can exchange batteries.

There are definitely some macro headwinds to take into consideration when deciding whether or not to take a position in NIO, but I consider it all a temporary blip in the road, and over the next couple years at least, NIO shareholders will reap significant gains.