Nio (NYSE:NIO) stock has been the rising star of the Chinese electric vehicle market. In the past year, NIO stock is up more than 230%, and more than 1,500% since the pandemic lows.

It is hard to argue with that kind of a stellar performance. Yet so far in 2021, NIO stock is down about 6%. In January 2021, the shares hit a record high of $66.99. Now they are hovering around $45.

Understandably, investors wonder whether now would be a good time to buy the stock.

InvestorPlace.com readers with a two- to three- year time horizon should consider buying the dips in NIO stock, especially if there is a further decline toward $40. Here’s why.

Market Share Backs NIO Stock

Shanghai-based Nio is one of the early players in China’s premium electric vehicle market. Founded in 2014, the company started making headlines at the height of the pandemic, as it outperformed Tesla (NASDAQ:TSLA) stock’s gains in 2020.

Primary bullish arguments for NIO stock have much to do with China’s growth prospects as well as the company’s capability to raise production at an impressive scale. With 1.34 million EVs sold in the past year, China is the largest EV market in the world. In other words, about 45% of global sales are in China. The expected sales figure for 2021 is 1.9 million.

On Aug. 2, Nio management released July delivery numbers. Even though a global chip shortage currently restrains output, Nio “delivered 7,931 vehicles in July 2021, representing a strong 124.5% year-over-year growth.” The company is expected to deliver short of 100,000 EVs this year.

Nio has recently gained market share from Tesla in China, whose brand is facing increased scrutiny from Chinese authorities. Now, Nio is among the top 10 EV names in China. However, the company faces stiff competition from rival EV companies Li Auto (NASDAQ:LI) and Xpeng (NYSE:XPEV).

Nio recently forged a new manufacturing agreement with the state-owned partner Jianghuai Automobile Group. The new manufacturing agreement is expected to more than double Nio’s current capacity to 240,000 vehicles annually.

Additionally, the company has recently shipped the first load of its flagship ES8 electric SUVs to Norway, the first time it has ever sold its vehicles outside China. A combination of increasing production capacity and expansion into a new market ensures that Nio could significantly grow revenues thanks to the booming EV industry in China and abroad.

How Q1 Earnings Came

While Nio is in the process of scaling up its operations and expanding its market, the company is still reporting net losses. Nio released first-quarter results in late April. Total revenue increased 482% year-over-year (YOY) to $1.22 billion. Metrics showed a wider-than-expected loss of $68.8 million for the first quarter. Diluted net loss per share stood at 48 cents. Cash and equivalents ended the quarter at $7.3 billion.

The surprise deterioration in earnings is expected to narrow in 2021. Analysts forecast Nio to pare losses to 44 cents per share this year from 73 cents in 2020. Revenue is also expected to more than double to $5.47 billion in 2021.

Nio will next report full Q2 results on Aug. 11. With a market capitalization (cap) of $74.5 billion, the company could grow significantly more. In the upcoming metrics, investors will want to see what other solid plans management has to continue the growth.

For instance, the car manufacturer has recently adopted an automated battery-swapping service to increase brand loyalty. Instead of waiting for a car to charge, drivers can quickly have their empty battery changed for a charged one. Aside from an additional income stream, the convenience of battery swapping may prove to be a critical competitive advantage in the long run.

Bottom Line for NIO Stock

Nio is poised to benefit from the booming EV market in China. However, competition is also heating up in the country. Therefore, NIO shareholders should take volatility for granted.

Based on a price-to-sales (P/S) ratio, Nio is valued almost as expensive as Tesla. NIO stock’s price-to-book (P/B) and P/S ratios stand at 17.60 and 16.52, respectively, an extremely lofty valuation. We should highlight that General Motors (NYSE:GM) supports P/B and P/S ratios of 1.74 and 0.69.

Therefore, a potential decline toward the $40 level would make NIO stock more attractive for the long term. The shares could once again reach the all-time high of more than $65 in several quarters.

Investors who do not want to commit capital to NIO stock may also consider ETFs that focus on EVs. Examples include the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL), the Global X Autonomous & Electric Vehicles ETF (NASDAQ:DRIV), and the iShares Self-Driving EV and Tech ETF (NYSEARCA:IDRV).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.