December 3, 2020

Now That Everybody Loves Nio, It’s Time to Start Taking Profits

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Back in early June, after the Nio (NYSE:NIO) share price had popped from $2 and change to $5.50, I predicted that Nio stock still had plenty of room to keep running. Somehow, I suspected that the company would remain in hyper-growth mode for a while longer.

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Amazingly, on Oct. 2, the Nio stock price closed at an eye-popping $21.18. While I projected some share-price growth, I won’t claim to have known in June that the stock would catapult above by early October.

The available data certainly paints a picture of a fast-developing electric vehicle manufacturer. As a result, I wouldn’t recommend attempting to short-sell Nio stock. That would just be foolhardy as the share price could keep on moving higher based on market hype and enthusiasm.

As for prospective long-side investors, there’s no going back now. We can’t turn back the clock and buy Nio stock at $5 or even $10. All we can do is assess whether the risk-versus-reward profile is favorable at this point. This, then, will require some technical analysis.

A Closer Look at Nio Stock

Even though Nio stock shed 2.67% on Oct. 2, the share price still remained up a heart-pounding 427% on a year-to-date basis. This makes the share-price surge I wrote about in June seem quaint in comparison.

With that, Nio stock didn’t only achieve its 52-week high in October. It reached its all-time high, far exceeding any price point in the stock’s history.

That might be exciting for traders who prefer to focus on momentum. On the other hand, the melt-up in the Nio stock price may cause concern among contrarians and investors who prefer value over exuberance.

And indeed, it’s difficult to find deep value in Nio stock at the moment. If you can believe it, the stock’s trailing 12-month earnings per share is -$44.10. That’s on a stock which trades at $21 and change. It’s probably not a good sign.

Blockbuster Results

On the other side of the coin is Nio’s recent performance, not as a stock but as a company. Viewing things from that angle, the argument turns decidedly bullish.

The company’s improvement can best be expressed through Nio’s freshly released automobile delivery figures. In particular, for the month of September, Nio delivered 4,708 vehicles. That signifies a 133.2% increase on a year-over-year basis.

Moreover, Nio delivered 12,206 vehicles during the third quarter of 2020. That represents a 154.3% year-over-year improvement. It’s also above the higher end of Nio’s guidance for the third quarter.

The impressive growth in Nio’s vehicle deliveries was likely a factor in Deutsche Bank analyst Edison Yu’s decision to reiterate his “buy” rating on Nio stock. Along with that, Yu maintained his upbeat price target of $24.

Getting Ahead of Itself

Even with the optimistic rating and price target on Nio stock, Yu seems to concede that the company continues to face stiff competition from its peers.

“The main push back we received on our bullish view is NIO’s brand does not create the same level of excitement and loyalty in China that Tesla or the German luxury auto makers command,” commented Yu.

He’s making an important point there. As noteworthy as Nio’s improvement has been, the company simply doesn’t have the scale, the capital or the name recognition of electric vehicle behemoth Tesla (NASDAQ:TSLA).

Indeed, I would suspect that the Nio stock price has gotten ahead of itself because some shareholders are wagering that Nio will be the next Tesla. Yet, this might or might not happen.

Nio is still a tiny company. Compared to the performance of some other automakers, 12,206 vehicle deliveries during a full quarter is small potatoes. Nonetheless, long-side traders have bid the share price up to the high heavens based on the assumption that Nio’s growth will continue on its current trajectory.

The Bottom Line

As an automaker in hyper-growth mode, Nio might live up to traders’ expectations and continue to deliver more record-setting quarters.

However, that assumption of success has, I believe, largely been priced into Nio stock already. I’m still rooting for the company to succeed, but value-focused investors should wait for the share price to come back down to earth before jumping into the trade.

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

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