Nio Stock Faces a New Hurdle. Is It a Buy on the Dip?

Nio (NYSE: NIO) stock has been on the move in recent months. Shares of the Chinese electric vehicle (EV) maker have doubled just since July. That's mainly because vehicle deliveries have set new monthly records in August and September.

A new overhang may have just hit the stock, though. And it could go much deeper than just a temporary pullback in Nio shares. Singapore's sovereign wealth fund, GIC, has sued Nio for allegedly violating U.S. securities laws by inflating its revenue. Investors are just now digesting the lawsuit filed through U.S. courts in late August.

Here are some things for Nio investors now to consider.

Image source: Nio.

Nio's new brands are gaining traction

Nio launched two new vehicle brands last year. Its core luxury brand is now also supported by the Firefly and Onvo brands that offer more lower-priced, family oriented options. The additions to its vehicle lineup helped Nio post record EV deliveries in both August and September. EV sales in September soared 64% year over year.

That's led to a sharply rising share price, with the stock doubling over the last six months. But that move higher included a recent 15% pullback.

One aspect of Nio's business that helps attract customers and differentiate it from competitors is its battery lease program. Nio's battery swap technology allows EV buyers to spend less up front by leasing batteries and using its swap stations to quickly replace drained batteries with fully charged ones. That program, though, is at the heart of a new lawsuit brought against the company.

Sovereign wealth fund sues Nio and executives

The lawsuit from Singapore's sovereign wealth fund alleges that Nio's battery swap business model led to a capital crisis that resulted in unlawfully recognized revenue. Nio invested capital to build a network of swap stations that require substantial automated technology, as well as ongoing power costs to charge drained batteries.

The lawsuit claims Nio used a related party company to illegally recognize battery lease revenue to help prop up its share price. It claims Nio specifically created battery asset company Weineng, controlled it, but didn't disclose its interest in the company. It alleges that Nio unlawfully recognized more than $600 million of leased battery revenue through Weineng.

GIC claims its Nio stock holding suffered from this practice after short-seller Grizzly Research reported the pulled-forward revenue in a 2022 publication. The lawsuit and accusations put Nio shareholders in a precarious position.

An investment in Nio has always been speculative. The Chinese EV market is full of competition, and the company has been losing money as it works to grow sales. For those who committed speculative capital to Nio stock, the lawsuit may not be worthy of a change in strategy. It is, however, an added risk. That said, the added risk makes it a poor time to add new funds to Nio stock, in my opinion.

Howard Smith has positions in Nio. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.