Why Nio Stock Skid 12% in May Despite 129% Growth in EV Sales

Nio (NYSE: NIO) electric vehicle (EV) sales are booming, margins are improving, and consumers are queueing up for its newly launched mass-market EV brand, Onvo. By all logical metrics, the Chinese EV maker is executing well and bucking the slowdown in China's overall automotive industry. Yet, the stock fell 12.4% in May, according to data provided by S&P Global Market Intelligence.

To understand why Nio fell, you probably have to look beyond its EVs and toward a shifting global landscape.

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Nio's numbers reveal solid growth

Nio released its first-quarter numbers last month. Q1 deliveries jumped 98% year over year to 83,465 units. Vehicle sales more than doubled to $3.3 billion, while gross margin improved from 7.6% to 19%, driven mainly by higher average selling prices. Nio reported a net loss of only $0.03 per share, crushing analysts' estimates.

It was also an aggressive launch period for the company, with Nio launching Onvo L80 SUV in mid-May and the Nio ES9 SUV later in the month. Importantly, it began deliveries immediately, providing an instant volume boost.

Additionally, Nio's ultra-premium ES8 continued to dominate, holding the number one sales spot in China for all vehicles priced above RMB 400,000 for five consecutive months.

With everything seemingly working in Nio's favor, why did the stock still fall in May?

The biggest cloud hanging over EV stocks was a slowdown in China's auto market, with car sales falling for the eighth straight month in May. Nio's CEO William Li even said that China's automotive market has likely moved past its "golden era." EVs and plug-in hybrids made up 62% of total car sales in May, but their sales were also down for the fifth straight month.

In what may have also come as a surprise to Nio investors, the company is pulling back on its international growth plans. Nio is not exiting any market, but is planning to adopt partnership models instead of direct sales to cut costs, according to CnEvPost. This is in sharp contrast to rival Xpeng's business strategy. Xpeng plans to double overseas sales in 2026. It already operates in 60 countries and regions and is targeting the Latin American market next.

Should you buy Nio stock now, or avoid it?

Nio is flush with cash and has the capital runway to keep expanding its massive battery-swapping infrastructure, also one of its biggest competitive advantages. It projects Q2 deliveries of 110,000 to 115,000 vehicles, representing nearly 53% to 60% growth year over year. Nio's shift toward an asset-light business model overseas is also a smart move.

However, the Chinese EV market is becoming a battleground. Nio faces intense, escalating domestic competition from not just the EV makers but also tech giants like Huawei, Xiaomi, and Alibaba, all of whom are now making EVs.

Nio still has the financial clout and infrastructure to grow in the domestic market, but there are other risks with owning Chinese stocks that investors should be aware of. The latest example is the U.S. Department of Defense officially adding Nio to its Section 1260H "Chinese Military Companies" list, along with other big players like Alibaba.

To be sure, this designation does not restrict U.S. investors from trading the stock, and Nio also plans to contest the inclusion and take legal action if necessary. The label, however, can create barriers to growth. Large institutional investors operate under strict compliance mandates that prohibit investing in stocks classified as a foreign military entity. That could mean institutional selling in Nio stock, effectively capping the upside.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Xiaomi. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.