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NIO Stock Is Plunging, But This Is an Opportunity to Buy

We’ve had electric automobiles since the 1870s. Yet they only recently caught on globally. Now every major auto manufacturer is in the process of launching their own line of electric vehicles. But there are also newcomers like Nio (NYSE:NIO). Last night, the electric-vehicle maker reported earnings and Nio stock is down 16% on the headline.

Nio stock price

Source: Shutterstock

While Nio earnings sound like a complete disaster, we have to keep in mind that year-to-date NIO was up 50%. And NIO was up 3.9% on the afternoon leading into the event. So this over exuberance made it difficult to avoid a dip after earnings.

In fact, this dip merely brings NIO back to levels seen less than two weeks ago.

The NIO selloff is not because they delivered a complete disaster quarter. This is more likely that the expectations rose too fast into it. They did miss on the bottom-line target but this is a growing company so I don’t worry about that as much as sales for now. I am also sure that the tariff war is also causing undue pressure on their sales flow and deliveries. So this is clearly not the time to short NIO stock and perhaps it’s an opportunity to start building a bullish position in it for the long term.

Emphasis here would be on the long term. Clearly Nio is far from being a company of scale but the potential is definitely there. First, they supply a massive market in China where perhaps they are ahead of the world for EVs. Second, they are already a household name thanks to the television bit that recently aired on mainstream TV.

This sudden exposure was mostly responsible for the recent sharp price squeeze and that is a classic scenario of too much exposure coming too fast. Yet, even with the spike, Nio stock still didn’t hit the all-time high. It would be safe to say that the sector and especially this stock is prone to hype. But eventually there should be enough meat to wrap around the bones.

This is a risky speculative stock so I don’t make it a large portion of my portfolio. I never risk an amount that would break my heart or my piggy bank on uncertain trades like this. Also it would be a good idea to enter the position in tranches.

Trading NIO Stock

As early as tomorrow, I could start a small position if I see positive signs that there are buyers towards the end of the day. Then if it falls again in a few days I can average down to a more attractive net price. I don’t do that too closely to the original entry or else I would be making my problem bigger and without reason.

So let’s find some specific levels that could be important on this dip.

On February 26th, after 60 Minutes aired a special on the company, the bulls spiked NIO stock to $10.64 per share. Still this fell short of its all-time high so the sky remain the limit on the upside. It it important to note that it also double topped yesterday at $10.63 per share.

Since then, the bulls successfully defended the $9 per share level. So that remains the support level to lose here. But there is room for NIO stock to fall further to $8 and still be on a positive up-slope.

Last year was tough for stocks, but it is important to note that NIO stock held a constant floor near $6 per share. While the S&P 500 was setting lower lows before they bottomed on Christmas, NIO held almost the same lows from inception. This is to say that the bulls have a firm footing to remount the rally effort.

There is far more upside than downside risk given the wide world of EVs. Nio is even into autonomous vehicles with artificial intelligence so they are on the right track. If long, then I stay long the stock and this dip won’t phase me. Most of analysts that cover it are still waiting to see proof as most have it as a HOLD. So it’s more likely to get a surprise upgrade than a downgrade once they figure out the potential.

The Bottom Line on NIO Stock

Personally, I’d ignore the fears that are baked into in this quarter’s earnings report.

The tariffs that are already in place messed with Nio’s demand curve so the forward guidance by default had to be less than enthusiastic. This is especially true since apparently the U.S .and China are close to a trade deal. So the caution this quarter from management is immaterial to the long-term future of Nio stock.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/nio-stock-is-plunging-but-this-is-an-opportunity-to-buy/.

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