NIO: A Classic Growth Trap

Nov. 29, 2022 7:25 PM ETNIO Inc. (NIO)42 Comments

Summary

  • NIO looks like an obvious growth trap to me, where the risk-reward ratio has shifted to the right side for investors looking for reversal stories in Chinese stocks.
  • The problem with NIO is that its sales and book valuation multiples are all it can give us for comparison.
  • What is happening to the company's operations can only alarm investors.
  • Tesla will cut prices by 9% for Q4 2022 - let us imagine that NIO will make a similar move to avoid losing market share. Then it will make much less revenue than priced in today.
  • Despite all the risks associated with my thesis, I believe that the stock market is inefficient in its assessment of the company's near-term growth prospects. NIO is a Sell.
  • We're currently running a sale at my private investing ideas service, Beyond the Wall Investing, where members get access to portfolios, market alerts, real-time chat, and more. Learn More »
NIO logo and the Nio"s user center, NIO House

Andy Feng

Thesis

In my opinion, NIO Inc. (NYSE:NIO) has turned into a classic growth trap - its high valuation may no longer be justified by the growth investors were hoping for in 2018 when the company went public. Since the early 2021 highs, when

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This article was written by

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Chief investment analyst at a small Singapore-registered family office. Mainly focused on special situations, IPOs, and undercovered/hidden stocks.


BS in Finance. In my bachelor's thesis, I looked at finding the best statistical/machine learning methods to predict underpricing of Initial Public Offerings (IPOs). A brief summary of my findings: using the KNN method, you could add about 24% of alpha compared to the average return of each initial public offer. In other words, with the AI algorithm I developed, it was possible to distinguish good IPOs from bad IPOs, where the average underpricing of selected companies in the test sample was 64.5%, while the overall average underpricing would be only 41.39%. More can be found here.


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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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