NIO (NYSE:NIO) stock had a dreadful start to the week, dropping 16% on Monday after investors pressed the sell button on US-listed Chinese stocks.
This was after President Xi Jinping won an historic third term as China’s leader over the weekend. He immediately called for regulation of wealth accumulation, singling out private capital in particular. Like clockwork, NIO stock was sold off in response.
Of course, all this is nothing new to investors in the electric vehicle (EV) company. Double-digit moves in the share price, one way or the other, have become routine. But I think the serious political risks now surrounding this growth stock just cannot be ignored any longer.
My own history with NIO stock
I first bought shares of NIO soon after it went public in 2018. Then, a few months later, the company’s cash balance dwindled seriously as it incinerated money in its pursuit of growth.
I waited patiently for news about the company recapitalising itself. But there was only silence from NIO’s investor relations department. Meanwhile, the stock price dipped as low as $1.50.
Reluctantly, I sold my shares and went away nursing my 50% or so loss. Then the company announced a bailout from a government-backed fund. The stock shot back up and I bought in again.
Fast-forward a couple of years, and US regulators once again announced that Chinese stocks listed in the United States were to be delisted if the companies did not comply with auditing requirements. I thought it unlikely that the government in Beijing would ever fully allow US auditing of Chinese companies.
I sold my shares again, though thankfully for a profit this time. My eventful history with NIO stock left me break-even, give or take.
The market opportunity remains enormous
The reason I invested (twice) in NIO was that my imagination was captured by the enormous growth potential of the industry the company was operating in. China has the largest and fastest-growing electric vehicle market in the world. Accelerated by supportive government subsidies and infrastructure, this EV market is only going to get much larger.
And NIO has certainly been capitalising on this opportunity. The company delivered a record 31,607 vehicles in the third quarter of this year, an increase of 29.3% year on year. It has expanded outside China to a number of EU countries, including Germany, Sweden, Denmark, and the Netherlands.
But various tensions between the US and China have overshadowed this operational progress. Some US military chiefs now believe China might invade Taiwan before 2024. If this occurs, I think US-listed Chinese stocks could totally collapse in much the same way Russian stocks did this year following the invasion of Ukraine.
No third time lucky
As a long-term investor, I like to repeatedly add to my holdings over time as my conviction in them grows. But I cannot risk adding new money into a stock I feel has the chance of being delisted.
I think NIO has the potential to become an exceptional company. But, as an investment, there are just too many political risks surrounding the stock for me to invest in it again.