The NIO (NYSE: NIO) share price performed outstandingly throughout 2020, generating a monstrous return of over 1,000% for the year. However, after peaking at $63 in February 2021, the stock has taken a tumble. Currently sitting at $36, the share price spiked 9% this week. This raises the question of whether I think the shares could rise back above the $50 mark, and if so, when.
Competitive landscape
Perhaps the most important factor influencing the NIO share price is how the electric vehicle (EV) landscape pans out over the next few years. Analysts at Deloitte expect EV market size to grow at 29% annually until 2030. NIO is currently headquartered in China. However, its models are now being sold in Norway, with more European expansion planned. This expansion will be key for NIO if it wants to capitalise on the high-growth industry.
But such high growth means fierce competition. For example, Ford has pledged $11bn from 2018-2022 for EV research and development. General Motors has set aside over double this, anticipating 30 new electric vehicles to hit the market in the next five years. NIO will have to keep finding new ways to stay ahead of the competition if it wants to become a frontrunner in the industry.
Inflation could affect the NIO share price
One reason I believe the share price could be in for a rocky ride in the future is the threat inflation poses. The primary reason for this is the US Federal Reserve has been involved in a process of quantitative easing (QE) for some time now, purchasing $120bn of mortgage bonds and Treasuries to prop up the US economy. As a consequence, inflation is creeping up with prices rising 5.3% in August compared to a year earlier. This is well above the Fed’s target of 2%.
So how is this relevant to the NIO share price? Well, as inflation rises, it’s more likely that the Fed may raise interest rates. NIO is currently a loss-making company with almost $10bn of debt on its balance sheet. Under current low-interest conditions, this debt is cheap. However, if rates rise I would expect a sharp decline in the share price.
Impressive results
Inflation worries aside, NIO is still producing some very encouraging numbers. Its second-quarter results for 2021 showed that vehicle sales were up 127% compared to Q2 2020. In addition to this, gross profit was up a staggering 402%. Total vehicles deliveries had also doubled compared to Q2 2020, reaching 21,896.
Therefore, in the short term, I don’t think we will see the NIO share price return above the $50 level. Moving to a medium-term outlook, I think that inflation readings will have a big impact on the price’s direction. If rates stay low, NIO will be able to keep cheaply financing its large debts. However, if rates begin to rise, I think the NIO share price could fall further. Looking at the long term, I think the company has solid potential but will have to fend off competition. If it plays its cards right, I feel NIO has the capacity to push above the $50 share price marker in the future. Therefore, as a current investor, I will be holding for the long term.
Dylan Hood owns shares of NIO Inc. The Motley Fool UK owns shares of and has recommended NIO Inc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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