Another big day on Tuesday has the Nio (NASDAQ: NIO) stock price higher by 67.6% in the past five trading sessions. That’s a massive move by any standard, but investors should be careful about reading too much into the huge swing in the stock.
There are plenty of market forces at play these days with NIO stock, and few of them have to do with the electric car business. NIO stock has always been a high-risk, high-reward stock to trade, but the stock’s volatility has really picked up in recent days ahead of its third-quarter earnings report.
Traders and investors should know what they are getting themselves into with NIO stock over the next couple of weeks.
Nio’s Big Move
From a fundamental standpoint, most of the big move in NIO stock has happened since the company reported its October vehicle deliveries. Nio delivered 2,526 vehicles in October, up 25% month-over-month and 61% year-over-year.
Bank of America analyst Ming Hsun Lee says Nio’s November deliveries accounted for 41% of his entire fourth-quarter delivery estimate for Nio.
“Meanwhile, NIO has started delivering ES6 and ES8 with an 84kWh battery pack, with NEDC driving range of 510km and 430km, respectively, in October,” Lee says.
That’s an impressive deliveries number. But in a vacuum, a good month of deliveries doesn’t typically increase a company’s market cap by 67%. Nio is certainly an extreme case, and my bet is the October deliveries data is just a small part of the reason the stock is up so much.
What’s Going on With NIO?
Without taking anything away from long-term Nio investors’ big week, NIO stock was down more than 80% in the past 12 months prior to its recent gains. Even after gaining 67%, it’s still down 64% overall in the past year.
The deliveries numbers certainly played a role in the big move. But I believe it’s third-quarter earnings that are moving the stock higher.
I have no idea what the company will report for the third quarter. I doubt anyone else does either given how unpredictable the company has been lately. The last thing I read about Nio prior to the deliveries number is that its CFO stepped down unexpectedly. Prior to that, it was larger-than-expected second-quarter losses and year-over-year revenue declines. Nio also cut its workforce by 13% this year.
All those negative headlines are the reason for the stock’s massive decline in the past year. But while longs are getting beaten up, short sellers are making a killing. As of late September, NIO stock had $286.2 million in short interest, about 24.5% of its float.
Prior to the past five days, those short sellers were enjoying a 59.8% drop in NIO stock price over the past three months. My guess is short sellers are cashing in on those gains by covering ahead of earnings. I know I would be covering if I were short NIO stock. NIO stock is a gamble, and short sellers are already sitting on huge gains.
How to Play NIO Stock
NIO stock reminds me of when I used to trade pink sheet penny stocks. It’s not about the business. It’s about market dynamics. NIO has a huge short position and is an extremely volatile and unpredictable stock. When you are trading these types of stocks, you have to lock in gains when you can.
Short sellers are likely locking in gains now before earnings come out just in case Nio reports a big beat. In my opinion, longs should do the same.
Any time a stock is up 67% in a week, longs should at the very least take some of their positions off the table. Those types of gains scream pullback. In a worst-case scenario, longs can take their 67% gains and miss out on additional earnings upside. Sure, the grass is always greener on the other side of the trade, but 67% gains in a week is a huge accomplishment for any trader. Take it while it’s certain, and don’t get greedy.
“We reiterate our Underperform rating as we believe there is still downside risk to consensus forecasts for vehicle shipments and refinancing risk is still high,” Lee says.
If you’re up for a speculative gamble, go ahead and hold onto NIO stock through earnings. As I’ve said before, Nio is exposed to major long-term growth themes I love: China and electric vehicles. But even the speculators can dial back their positions ahead of earnings and lock in some of those one-week gains. I’d be willing to bet long-term bulls will be able to buy back into their positions at a lower price sometime in the next few months.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
