The Nio (NYSE:NIO) fundamentals start with the relative success of the ongoing revolution of the electric motor versus the internal combustion motor (ICE). In the last few years, Tesla (NASDAQ:TSLA) did tremendous work in expanding the role of e-cars.
Before that, this had been a losing battle. We have had electric vehicles since the 1880s, which was somewhat of a joke back then but is no longer so. Tesla, in spite of all the antics surrounding the Elon Musk, is a smashing success and legitimized the industry. Nio benefits from those efforts.
Nevertheless, e-cars are still statistically far behind. It will take decades of continued success for the electric motor to be a close contender to the ICE.
Nio is one of the companies that has gained notoriety of late in this sector, yet investing in it is still a long term opportunity. Nio stock is languishing near its lows and far from its flagrant highs.
Perhaps it was bad luck that it went public last year shortly before the stock market October correction, which hit all stocks hard and broke Nio stock price momentum in the process. Also last March the stock spiked close to its all-time high after a special report aired on 60 Minutes, only to restart a correction that was even a bigger disappointment than last October as it hit a low of $2.40 per share. Nio stock bulls were once again trapped in a loss from much higher levels.
Nio Stock Investment Is Still Viable
The dips on Wall Street don’t always mark the end of a company. This is a broken stock that needs time to heal itself. And therein lies today’s opportunity: the charts show a potential to revisit $6 per share.
Since mid-June, Nio has set higher lows trying to break out of the $4 neckline. At a certain point the bears will get tired of defending it and the buyers will prevail. Price will overshoot to a measured move that will carry it to $6 per share.
But this won’t be easy because Nio stock will need the help of the general markets. There will also be resistance at $5 per share as it was the ledge from which the stock fell mid-May.
Nio Investment Environment Still Favors the Bulls
The environment in which the company operates is still healthy. The global demand for autos is thriving in spite of rhetoric that the new generations don’t want to own cars. I vehemently disagree. The global demand for cars is still on fire, especially in the U.S. The Utopian world where we don’t want to own cars is still but a dream.
NIO has a wide runway ahead and it is up to management to continue to execute plans. The market in China, where it operates, is the largest in the world so the NIO stock price has probably seen its worst days.
Long-term investors in NIO are in it regardless of these short-term dips and spikes. For those looking for faster profits they too have an opportunity today. But the technical bullish pattern is developing and the Nio price action could still fail.
Earnings are approaching and if the breakout lingers until then the outcome will be binary. The short-term reaction to those make the outcome of this opportunity more so a gamble. But if I am willing to own the shares a little bit longer, then it’s a bet with limited potential losses.
The Nio stock price is low enough that the downside risk is much smaller than the upside opportunity. This is not the same as saying the stock is cheap, as it sells at four times sales. I typically don’t like to take a position into a technical opportunity ahead of when the actual breakout occurs, but I can understand if investors are eager to jump the gun.
Options traders can easily do this. If I am willing to own shares now then I can alternatively use options to go long Nio without any money out of pocket. Instead of buying the shares and leaving no room for error, I sell Nio in January at $3 put and collect 65 cents for it. Then I don’t even need a rally to profit. I am guaranteed a win as long as Nio stock stays above my strike. Else I own the shares and break even below $2.40.
As I said in my prior Nio write-ups, investing in it remains a speculative trade. This tactical setup deserves smaller proportion than fundamental bets and requires intestinal fortitude. I don’t risk more than I can lose.
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. Join his live chat room free here.
