Stocks to sell

At the start of December, Nio (NYSE:NIO) stock appeared to be on the verge of getting out of its extended slump. As you may know, at the time shares in the China-based electric vehicle maker were rallying, following the release of strong vehicle delivery data, and news of China easing on its ‘zero Covid’ restrictions.

More recently, however, the stock has started to pull back. Sure, some of this may be due to the latest news from the Federal Reserve about interest rates, which doesn’t bode well for growth stocks. However, market sentiment for Nio may be shifting back to negative, for not just macro-related reasons, but for more company-specific reasons as well.

Instead of being in the early innings of a rebound, Nio’s recent rally could be little more than a short-lived “dead cat bounce.” More disappointment may be just around the corner.

NIO Stock: A Look Under the Hood

On Dec. 1, Nio’s management released vehicle delivery data for November 2022. During the month, the company reported 14,178 deliveries, a 30.3% year-over-year increase, and a nearly 41% increase from the preceding month’s delivery figure (10,059 vehicles).

Atop the “zero Covid” news, plus the company’s own announcement of its plans to “further accelerate” production and deliveries this month, and you might be questioning why investors are beginning to bail on NIO stock. However, while a mere kicking of the tires may suggest NIO is a possible buy, check under the hood. You may come to a far different conclusion.

For one, November’s delivery numbers may not necessarily mark the start of a trend. As InvestorPlace’s Thomas Niel recently discussed, some commentators have argued that these impressive figures may be a result of the upcoming expiration of China’s EV tax incentives.

This factor may be pulling demand forward into the closing months of this year, resulting in softening demand in 2023.

That’s not the only concern at hand with Nio. The end of China’s “zero Covid” may fail to spark a Chinese economic rebound, and by extension, a further re-acceleration for the company’s future growth.

Challenges Could Continue at Home and Abroad

As Bloomberg News reported on Dec. 14, there could be additional turmoil in store for the Chinese economy. The “zero Covid” lockdowns may be over, but this is starting to result in increased Covid-19 cases, possibly causing an economic slowdown similar to the one caused by the restrictions.

A “reopening” for the China economy may not start to take shape until at least mid-2023. Why is this bad news for NIO stock? The EV maker may be talking up a good game, with its plans to ramp up production, but this increased production could easily end up being met by weakening demand.

The prospect of continued challenges points even more to the company falling short of expectations over the next quarter or two. In turn, expectations about future growth, and the for-now unprofitable company’s path to profitability, may be dialed back, putting another round of pressure on shares.

If that’s not bad enough, challenges for Nio aren’t limited to its home market. It remains questionable whether Nio’s gamble on Europe expansion will pay off. Between high competition from market incumbents and Europe’s own economic woes, making headway in this new frontier could prove elusive.

The Takeaway

It’s possible that the market is again looking at Nio with a more critical eye. On closer inspection, the situation with the company appears far less rosy than it does at first glance.

Instead of being a sign that sales growth is coming back, the latest delivery numbers could merely be the product of a one-time event.

Instead of kicking off the start of a resurgence of economic activity in China, the pandemic could continue to have a negative impact on the Chinese economy in the months ahead. Along with these China-related issues, is the uncertainty surrounding its risky expansion into Europe.

Put simply, it’s clear that the story has not changed enough to justify a move to higher prices. The market is making the right call with NIO stock. Following their lead is the best move.

NIO stock earns a D rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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