It’s been a bumpy ride for Nio (NASDAQ:NIO), the Chinese electric car maker. However, after a tumultuous fall, Nio stock finally looks to be getting its footing back. Could Nio stock price be poised to rally?
That’s certainly possible, as the charts of Nio stock continue to improve. However,NIO will need to change its outlook from negative to positive. After all, Nio stock price didn’t tumble from $10 in March to $2.50 in mid June for no reason. Moreover, the PowerShares QQQ ETF (NASDAQ:QQQ) rallied over 7% during the same period.
It’s true that Chinese equities fell out of favor in May as trade tensions flared, contributing to the decline of Nio stock price. However, the company’s disappointing deliveries and sagging financials weighed on the share price more than the trade tensions.
Let’s look at the charts of Nio stock.
Trading Nio Stock
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Nio stock price had been rangebound between $6 and about $8 for months. Take a look at the chart above and notice how well Nio weathered the fourth-quarter stock-market decline. Sure, Nio stock price fell from $8 to $6 — a 25% drubbing — but that’s hardly unexpected from a newly issued stock. And Nio’s status as a Chinese startup automaker further exacerbated its weakness and volatility.
Considering that Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and other high-profile, high-quality names took a worse hit, I’d say Nio stock handled the volatility pretty well. Further, it held its range support, which is even better.
Fast forward to Q1 of 2019 and Nio stock price was in full-on breakout mode. Shares ripped to $10 and consolidated in that area ahead of its earnings.
But it’s been all downhill from there. Shares tanked 50% in a few weeks and 75% in a few months. However, Nio stock stabilized once it hit $2.50, staying near that level for most of June.
Nio stock price is now north of its 20-day and 50-day moving averages and is consolidating in a wedge pattern. If it climbs, it will need to take out $3.75 to get to $4. If it eclipses $4, $5 is a realistic target.
If the wedge breaks lower, it’s important that Nio stock not fall below its 50-day moving average. If it does drop below that level, a test of the lows could be coming.
The rally from $2.50 to $4 and the subsequent consolidation have some investors feeling bullish about Nio stock. From a purely technical standpoint, that’s justified. However, the company’s fundamentals make it a bit harder to become upbeat on Nio stock.
Is Nio Worth the Risk?
China’s auto market has been under pressure, as the global economy remains very much mixed. While the country is pushing for a greener approach and China is the world’s largest electric car market, Nio is not growing tremendously. In fact, earlier this year, its slowdown was toxic.
Nio’s most recent results showed a drastic sequential slowdown,as its revenue fell 54%, spurred by a nearly 50% decline in the deliveries of its ES8 vehicle, from 7,980 in Q4 to 3,989 in Q1 of 2019. Its gross and operating margins went from positive to deeply negative, and its net losses jumped almost 80% year-over-year.
It’s very tough to succeed in the auto business. Worse, even the firms that do succeed never get premium valuations, except for Tesla (NASDAQ:TSLA) and Ferrari (NASDAQ:RACE). General Motors (NYSE:GM), Ford (NYSE:F) and others all trade at major discounts to the market.
There has been some improvement in that situation, though. Earlier this month, Nio announced Q2 deliveries of 3,553, topping its guidance of 2,800 to 3,200. Total deliveries increased each month in the quarter, while its new vehicle, the ES6, has been launched.
Should all of that make investors ignore Nio’s free cash flow deficit, negative margins and huge losses? Or the fact that its long-term debt is more than double its $3.7 billion market cap?
Perhaps not, but that’s the risk bulls will have to take. Nio stock isn’t for everyone, and it’s certainly a speculative holding.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL, AMZN and NVDA.
