What China’s Lockdown and Higher Prices Mean for Nio Stock

When Nio (NYSE:NIO) said it would suspend production due to supply chain disruptions earlier this month, it had no choice in the matter. This is because China has a ruthless zero Covid policy, and rising cases in Shanghai forced the government to lock down the city. The country’s response in March harmed Nio’s supply partners, but investors did not panic by selling NIO stock. Instead, shareholders are willing to let the Chinese government manage the pandemic in the way it knows best for its people. Meanwhile, Nio customers may patiently accept delays in electric vehicle (EV) deliveries.

Of course, Nio’s supply chain will eventually return to normal. And the disruption will have minimal long-term damage to its business for several reasons.

First, Nio will soon expand outside of China. For example, it will increase its presence in Europe and more than 25 countries worldwide. In turn, Nio’s revenue potential will grow as it markets its latest ET5 electric sedan to global markets. Second, the company has the opportunity to offer a battery-swapping station solution. While other EV makers depend on charging stations, Nio’s battery-swapping station differentiates it. In addition, the stations will support multiple Nio vehicles in Europe.

With all of this in mind, Nio has the experience to build its business in Europe. In fact, it “already sells its ES8 model in Norway, and it plans to expand to the Netherlands, Sweden, Denmark, and Germany” this year. And when it operates in 25 more countries by 2025, Nio’s market capitalization at current levels will look too low.

In the near term, though, Nio is among the EV makers who need to manage higher costs. The company has plans for a price hike set for May 10, as well as an increase in the cost of its Battery as a Service (BaaS) rental rates. This suggests that it has strong branding and demand, and customers are willing to pay more for a Nio EV.

Overall, the company is not profitable, so it needs to pass the higher raw material prices to customers. In turn, the starting prices of Nio’s SUVs will increase by 10,000 yuan. However, the firm will not increase the prices of its ET7 or ET5 sedans.

Right now, the price hike is not a risk for Nio investors yet. Still, if commodity prices keep rising, the company will need to raise prices again this year. Eventually, consumers may give up on EVs entirely until prices fall.

Nonetheless, NIO stock investors should stay the course. EV and clean energy investments are volatile, but the Covid-related disruptions in China will eventually ease. So, in the medium term, higher raw material prices may hurt demand. But as long as those costs do not rise by too much, Nio should not suffer much of a loss in business momentum.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.