The share price of the Chinese electric vehicle manufacturer NIO (NYSE:NIO) has dropped almost 25% these past few weeks, despite no new developments being announced within the business. So whats going on? Let’s take a look.
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What caused NIO’s share price to drop by a quarter?
There seem to be several catalysts behind the pullback in its share price. The most apparent is that growth stocks, in general, have been on a downward trajectory these past few weeks.
Many investors are concerned about a rising level of inflation and consequently triggered an increase in long-term bond yields. In fact, the 10-year US Treasury Note has more than doubled in the space of 6 months, rising over 1.5%.
But what does that have to do with stocks? Well, higher-long term yields lower the present value of future earnings for companies. And as the value of promised returns is lower, share prices adjust themselves. In this case, the share price dropped, but the reverse is entirely possible under the right conditions.
NIO is certainly not the only growth stock to have suffered these past few weeks. There are plenty of companies in the technology, renewable energy, and even cannabis sectors that have also seen double-digit declines.
A rich valuation plus inflation don’t mix well
As previously stated, when fears of inflation begin circling, stocks with high valuations tend to be the ones that suffer the most.
Don’t forget that even after this recent decline, the NIO share price is still up by nearly 1,000% in the space of 12 months. This surging share price has pushed the stock’s valuation to almost $82bn.
Comparing that against the 43,728 cars it sold in 2020 places the average value per car at nearly $1.88 million.
Now that’s one expensive car. And as incredible as NIO’s vehicles could be, that’s a pretty lofty expectation of returns coming from investors.
Should I be worried about the NIO share price?
The drop in NIO’s share price appears to be linked to factors unrelated to the underlying business. The company hasn’t made any recent announcements that would indicate its in any kind of trouble.
To me, it just looks like the stock simply got caught in the crossfire of a general market pullback. Something that, as an investor, I tend to ignore. For now, NIO investors will have to wait for the firm’s fourth-quarter results to be published to learn more about the company’s progress.
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Zaven Boyrazian does not own shares in NIO. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
