diff --git a/README.md b/README.md
index 3a06ef705d..8a10fa342b 100644
--- a/README.md
+++ b/README.md
@@ -131,6 +131,7 @@ Enable the rules that you would like to use.
 * [react/no-unescaped-entities](docs/rules/no-unescaped-entities.md): Detect unescaped HTML entities, which might represent malformed tags
 * [react/no-unknown-property](docs/rules/no-unknown-property.md): Prevent usage of unknown DOM property (fixable)
 * [react/no-unsafe](docs/rules/no-unsafe.md): Prevent usage of unsafe lifecycle methods
+* [react/no-unstable-nested-components](docs/rules/no-unstable-nested-components.md): Prevent creating unstable components inside components
 * [react/no-unused-prop-types](docs/rules/no-unused-prop-types.md): Prevent definitions of unused prop types
 * [react/no-unused-state](docs/rules/no-unused-state.md): Prevent definition of unused state fields
 * [react/no-will-update-set-state](docs/rules/no-will-update-set-state.md): Prevent usage of setState in componentWillUpdate
diff --git a/docs/rules/no-unstable-nested-components.md b/docs/rules/no-unstable-nested-components.md
new file mode 100644
index 0000000000..b1a0e250ba
--- /dev/null
+++ b/docs/rules/no-unstable-nested-components.md
@@ -0,0 +1,79 @@
+# Prevent creating unstable components inside components (react/no-unstable-nested-components)
+
+Creating components inside components without memoization leads to unstable components. The nested component and all its children are recreated during each re-render. Given stateful children of the nested component will lose their state on each re-render.
+
+React reconcilation performs element type comparison with [reference equality](https://github.com/facebook/react/blob/v16.13.1/packages/react-reconciler/src/ReactChildFiber.js#L407). The reference to the same element changes on each re-render when defining components inside the render block. This leads to complete recreation of the current node and all its children. As a result the virtual DOM has to do extra unnecessary work and [possible bugs are introduced](https://codepen.io/ariperkkio/pen/vYLodLB).
+
+## Rule Details
+
+The following patterns are considered warnings:
+
+```jsx
+function Component() {
+  function UnstableNestedComponent() {
+    return <div />;
+  }
+
+  return (
+    <div>
+      <UnstableNestedComponent />
+    </div>
+  );
+}
+```
+
+```jsx
+class Component extends React.Component {
+  render() {
+    function UnstableNestedComponent() {
+      return <div />;
+    }
+
+    return (
+      <div>
+        <UnstableNestedComponent />
+      </div>
+    );
+  }
+}
+```
+
+The following patterns are **not** considered warnings:
+
+```jsx
+function OutsideDefinedComponent(props) {
+  return <div />;
+}
+
+function Component() {
+  return (
+    <div>
+      <OutsideDefinedComponent />
+    </div>
+  );
+}
+```
+
+```jsx
+function Component() {
+  const MemoizedNestedComponent = React.useCallback(() => <div />, []);
+
+  return (
+    <div>
+      <MemoizedNestedComponent />
+    </div>
+  );
+}
+```
+
+## Rule Options
+
+```js
+...
+"react/no-unstable-nested-components": "off" | "warn" | "error"
+...
+```
+
+## When Not To Use It
+
+If you are not interested in preventing bugs related to re-creation of the nested components or do not care about optimization of virtual DOM.
diff --git a/index.js b/index.js
index bc0c30a43d..e40300d7d5 100644
--- a/index.js
+++ b/index.js
@@ -74,6 +74,7 @@ const allRules = {
   'no-unescaped-entities': require('./lib/rules/no-unescaped-entities'),
   'no-unknown-property': require('./lib/rules/no-unknown-property'),
   'no-unsafe': require('./lib/rules/no-unsafe'),
+  'no-unstable-nested-components': require('./lib/rules/no-unstable-nested-components'),
   'no-unused-prop-types': require('./lib/rules/no-unused-prop-types'),
   'no-unused-state': require('./lib/rules/no-unused-state'),
   'no-will-update-set-state': require('./lib/rules/no-will-update-set-state'),
diff --git a/lib/rules/no-unstable-nested-components.js b/lib/rules/no-unstable-nested-components.js
new file mode 100644
index 0000000000..baaf366700
--- /dev/null
+++ b/lib/rules/no-unstable-nested-components.js
@@ -0,0 +1,112 @@
+/**
+ * @fileoverview Prevent creating unstable components inside components
+ * @author Ari Perkkiö
+ */
+
+'use strict';
+
+const Components = require('../util/Components');
+const docsUrl = require('../util/docsUrl');
+
+// ------------------------------------------------------------------------------
+// Constants
+// ------------------------------------------------------------------------------
+
+const ERROR_MESSAGE = 'Do not create unstable nested components. Declare them outside the component or memoize them.';
+
+// ------------------------------------------------------------------------------
+// Rule Definition
+// ------------------------------------------------------------------------------
+
+module.exports = {
+  meta: {
+    docs: {
+      description: 'Prevent creating unstable components inside components',
+      category: 'Possible Errors',
+      recommended: false,
+      url: docsUrl('no-unstable-nested-components')
+    },
+    schema: []
+  },
+
+  create: Components.detect((context, components, utils) => {
+    /**
+     * Check whether given node is declared inside another component
+     * @param {ASTNode} node The AST node being checked
+     * @returns {Boolean} True if node has a parent component, false if not
+     */
+    function isAnyParentComponent(node) {
+      if (!node.parent || node.parent.type === 'Program') {
+        return false;
+      }
+
+      return components.get(node.parent) || isAnyParentComponent(node.parent);
+    }
+
+    /**
+     * Check whether given node is inside class component's render block
+     * @param {ASTNode} node The AST node being checked
+     * @returns {Boolean} True if node is inside class component's render block, false if not
+     */
+    function isInsideRenderMethod(node) {
+      const parentComponent = utils.getParentComponent();
+      if (!parentComponent || parentComponent.type !== 'ClassDeclaration') {
+        return false;
+      }
+
+      return (
+        node.parent
+        && node.parent.type === 'MethodDefinition'
+        && node.parent.key
+        && node.parent.key.name === 'render'
+      );
+    }
+
+    /**
+     * Check whether current node is a stateless component declared inside class component.
+     * Util's component detection fails to detect stateless components inside class components.
+     * @returns {Boolean} True if current node a stateless component declared inside class component, false if not
+     */
+    function isStatelessComponentInsideClassComponent() {
+      const parentComponent = utils.getParentComponent();
+      const parentStatelessComponent = utils.getParentStatelessComponent();
+
+      return (
+        parentComponent
+        && parentStatelessComponent
+        && parentComponent.type === 'ClassDeclaration'
+        && utils.getStatelessComponent(parentStatelessComponent)
+      );
+    }
+
+    /**
+     * Check whether given node is a unstable nested component
+     * @param {ASTNode} node The AST node being checked
+     */
+    function validate(node) {
+      if (!components.get(node) && !isStatelessComponentInsideClassComponent()) {
+        return;
+      }
+
+      // Prevent reporting nested class components twice
+      if (isInsideRenderMethod(node)) {
+        return;
+      }
+
+      if (isAnyParentComponent(node)) {
+        context.report({node, message: ERROR_MESSAGE});
+      }
+    }
+
+    // --------------------------------------------------------------------------
+    // Public
+    // --------------------------------------------------------------------------
+
+    return {
+      FunctionDeclaration(node) { validate(node); },
+      ArrowFunctionExpression(node) { validate(node); },
+      FunctionExpression(node) { validate(node); },
+      ClassDeclaration(node) { validate(node); }
+    };
+  })
+};
diff --git a/tests/lib/rules/no-unstable-nested-components.js b/tests/lib/rules/no-unstable-nested-components.js
new file mode 100644
index 0000000000..18a7fd558e
--- /dev/null
+++ b/tests/lib/rules/no-unstable-nested-components.js
@@ -0,0 +1,332 @@
+/**
+ * @fileoverview Prevent creating unstable components inside components
+ * @author Ari Perkkiö
+ */
+
+'use strict';
+
+// ------------------------------------------------------------------------------
+// Requirements
+// ------------------------------------------------------------------------------
+
+const RuleTester = require('eslint').RuleTester;
+const rule = require('../../../lib/rules/no-unstable-nested-components');
+
+const parserOptions = {
+  ecmaVersion: 2018,
+  sourceType: 'module',
+  ecmaFeatures: {
+    jsx: true
+  }
+};
+
+const ERROR_MESSAGE = 'Do not create unstable nested components. Declare them outside the component or memoize them.';
+
+// ------------------------------------------------------------------------------
+// Tests
+// ------------------------------------------------------------------------------
+
+const ruleTester = new RuleTester({parserOptions});
+ruleTester.run('no-unstable-nested-components', rule, {
+  valid: [
+    {
+      code: `
+      function OutsideDefinedFunctionComponent() {
+        return <div />;
+      }
+
+      function Component() {
+        return (
+          <div>
+            <OutsideDefinedFunctionComponent />
+          </div>
+        );
+      }`
+    },
+    {
+      code: `
+      const OutsideDefinedVariableComponent = () => {
+        return <div />;
+      }
+
+      function Component() {
+        return (
+          <div>
+            <OutsideDefinedVariableComponent />
+          </div>
+        );
+      }`
+    },
+    {
+      code: `
+      class OutsideDefinedClassComponent extends React.Component {
+        render() {
+          return <div />;
+        }
+      }
+
+      function Component() {
+        return (
+          <div>
+            <OutsideDefinedComponent />
+          </div>
+        );
+      }`
+    },
+    {
+      code: `
+      function Component() {
+        const MemoizedNestedComponent = React.useCallback(() => <div />, []);
+
+        return (
+          <div>
+            <MemoizedNestedComponent />
+          </div>
+        );
+      }`
+    },
+    {
+      code: `
+      function Component(props) {
+        // Should not interfere handler declarations
+        function onClick(event) {
+          props.onClick(event.target.value);
+        }
+
+        return (
+          <div>
+            <button onClick={onClick} />
+          </div>
+        );
+      }
+      `
+    },
+    {
+      code: `
+      function Component() {
+        // This is fine, as the returned element has same reference
+        function getComponent() {
+          return <div />;
+        }
+
+        return (
+          <div>
+            {getComponent()}
+          </div>
+        );
+      }
+      `
+    }
+  ],
+
+  invalid: [
+    {
+      code: `
+      function Component() {
+        function UnstableNestedFunctionComponent() {
+          return <div />;
+        }
+
+        return (
+          <div>
+            <UnstableNestedFunctionComponent />
+          </div>
+        );
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      function Component() {
+        const UnstableNestedVariableComponent = () => {
+          return <div />;
+        }
+
+        return (
+          <div>
+            <UnstableNestedVariableComponent />
+          </div>
+        );
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      const Component = () => {
+        function UnstableNestedFunctionComponent() {
+          return <div />;
+        }
+
+        return (
+          <div>
+            <UnstableNestedFunctionComponent />
+          </div>
+        );
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      const Component = () => {
+        const UnstableNestedVariableComponent = () => {
+          return <div />;
+        }
+
+        return (
+          <div>
+            <UnstableNestedVariableComponent />
+          </div>
+        );
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      function Component() {
+        class UnstableNestedClassComponent extends React.Component {
+          render() {
+            return <div />;
+          }
+        };
+
+        return (
+          <div>
+            <UnstableNestedClassComponent />
+          </div>
+        );
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      class Component extends React.Component {
+        render() {
+          class UnstableNestedClassComponent extends React.Component {
+            render() {
+              return <div />;
+            }
+          };
+
+          return (
+            <div>
+              <UnstableNestedClassComponent />
+            </div>
+          );
+        }
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      class Component extends React.Component {
+        render() {
+          function UnstableNestedFunctionComponent() {
+            return <div />;
+          }
+
+          return (
+            <div>
+              <UnstableNestedFunctionComponent />
+            </div>
+          );
+        }
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      class Component extends React.Component {
+        render() {
+          const UnstableNestedVariableComponent = () => {
+            return <div />;
+          }
+
+          return (
+            <div>
+              <UnstableNestedVariableComponent />
+            </div>
+          );
+        }
+      }`,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      function Component() {
+        function getComponent() {
+          function NestedUnstableFunctionComponent() {
+            return <div />;
+          };
+
+          return <NestedUnstableFunctionComponent />;
+        };
+
+        return (
+          <div>
+            {getComponent()}
+          </div>
+        );
+      }
+      `,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    },
+    {
+      code: `
+      function Component() {
+        return (
+          <div>
+            {(() => {
+              function InlinedJSXComponent() {
+                return <div />;
+              };
+
+              return <InlinedJSXComponent />;
+            })()}
+          </div>
+        );
+      }
+      `,
+      errors: [
+        {
+          message: ERROR_MESSAGE
+        }
+      ]
+    }
+  ]
+});