It has been a tough week recently for China-based stocks. And NIO (NYSE:NIO), a competitor to U.S.-based automaker Tesla (NASDAQ:TSLA), has undoubtedly been hard hit. After soaring past $10 earlier this year, Nio stock has since slumped to $3.17, in line with the bearish run on all China-based stocks.
In fact, Chinese stocks, as represented by the iShares MSCI China ETF (NASDAQ:MCHI) recently closed at $55 and the exchange-traded fund seems headed to its 52-week low of $50, after having topped $60 just last month.
So should Nio stock investors be worried?
The market has hammered all stocks related to China out of concerns of an upcoming trade war and accusations that China has manipulated its currency. No stock has been spared from the selloff.
Alibaba (NYSE:BABA) is trading at $162, after having recovered from a steep fall to $152, yet it’s still well off its 52-week high of $195. Baidu (NASDAQ:BIDU), now trading around $99, is just at its 52-week low after plummeting from $234 late last year.
However, trade war or not, NIO will likely be a survivor and the headline damage could present real value if the Nio stock price gets much cheaper.
The Trade War Will Most Heavily Hit Exporters to the U.S. … Not NIO
The phrase trade war with China is undoubtedly a frightening concept. Understandably, investors will dump any China-based stock. Yet, this is far from any outright war, but rather a readjustment of U.S. import tariffs that will hit China exporters. However, the bulk of NIO’s market is in mainland China, one of the world’s largest markets for electric vehicles (EV).
No doubt, the trade war will weigh heavily on stock prices, and China will be hit. But the Chinese economy will likely remain rock solid. Last Thursday, China reported that its “exports rose 3.3% over a year earlier … rebounding from June’s 1.3% contraction.” Meanwhile, “[i]mports shrank 5.6% … an improvement over the previous month’s 7.3% decline.”
The figures were mostly better than expected. In short, the Chinese export juggernaut will continue to steam forward.
Moreover, threats of a Chinese yuan devaluation and the global economic impact have already hit the market and are well baked into current prices. In most bad news related selloffs, stocks get hit hard at first and are usually oversold. Savvy value seeking investors then step in and bottom-fish for bargains. Similarly, NIO stock, after the sell off, may have been oversold by the market on the basis of an absolute worst case scenario.
China Yuan Devaluation Could Help
Currency devaluation is a two-edged sword. It will make Chinese exports cheaper and more competitive in the U.S. market. At the same time, U.S. exporters to China will have to hike their prices, thus cutting U.S. export sales. However, a devalued Chinese yuan will actually protect domestic Chinese manufacturers, such as NIO, in their home market.
Tom Elliott, international investment strategist at Devere Group, a U.K.-based financial advisory firm, said a weaker yuan would increase cost-cutting pressure around the world’s manufacturing industries:
“Chinese goods, always competitive on price, will be even more competitive … This is therefore bad news for manufacturers outside of China, at a time when global manufacturing is struggling with weakening demand growth and the negative impact of the U.S.-China trade dispute on their supply lines and profits.”
Translation: A weaker yuan will hurt U.S.-based and non-Chinese manufactures the most. NIO, with 100% of operations inside China, is largely safe. So in the longer run, the Nio stock price might not be in as much trouble as some might think.
An Out-of-the-Money, Long-Dated Option On a Hot Market
At a rock bottom price below $3, NIO stock will be so undervalued as it will be akin to buying an out-of-the-money, long-dated call option. Such an option has zero intrinsic value, but potentially a huge upside if the underlying asset significantly appreciates. The EV market in China is just beginning to take off. EV sales will skyrocket in the next five years, mainly because it is much cheaper to operate an EV than a traditional gasoline-powered vehicle and there’s a drive by the Chinese government to cut pollution.
NIO commands the size, capacity, market share and evolving product line to make it ideally positioned to leverage the incredible growth of the Chinese EV market. Already, despite its ups and downs, as well as a recently disappointing earnings call, top-line revenues for NIO have increased over 400% from one year ago.
The NIO brand was recently ranked highest-quality in J.D. Power’s inaugural China New Energy Vehicle Experience Index Study. NIO beat out several competitors, including second-ranked BMW (OTCMKTS:BMWYY). Two Chinese automakers — Chery Automobiles’ Chery and GAC Motors’ Trumpchi, both state-owned — tied for third place in the rankings.
There will certainly be some tough weeks ahead for NIO stock as political rhetoric about a trade war with China continues to hammer the market. NIO will also see challenges as the Chinese government reduces subsidies on EV sales.
But if Nio stock falls below the crucial $3 level, it will present an excellent opportunity for a long-term hold.