Nio (NYSE:NIO) ended 2019 with a bang, much to delight of reveling bulls as Wall Street said goodbye to an otherwise lousy year. However, a little more than a week into the 2020, is Nio stock going to usher in another headache for investors or are shares in gear for more vroom, vroom price action?
To be sure, 2019 was an ugly year as the Nio stock price cratered nearly 40%. A trade war, mounting losses and problematic debt were standard and problematic features for most of the calendar year much to the chagrin of NIO investors. But just in front of the new decade the Chinese EV maker finally showed signs it could be turning the corner.
On Dec. 30, the upstart announced all-around stronger-than-forecast results for its fiscal third quarter. By the numbers, NIO stock easily topped Street earnings estimates by 8 cents on a loss of 33 cents. The beat also reflected a solid improvement year-over-year. Sales grew by 20% and also came in ahead of consensus views.
Adding a bit of high-octane fuel in its own right, immediately in front of the report Nio announced a new battery pack to “significantly improve” the driving range of its vehicles and unveiled its EV coupe SUV, the EC6. The vehicle is Nio third production model and widely viewed as strong competition for Tesla’s (NASDAQ:TSLA) Model Y crossover due out in 2020.
It wasn’t all good news for Nio stock however. Executives did acknowledge the company’s cash balance of around $275 million isn’t sufficient to provide working capital and liquidity for continuous operation over the next year. To say the the least, it’s a risk in need of a big-time fix in 2020. Still, after a hard road traveled in 2019 and helped along by some 20% short interest in NIO stock, shares did rocket higher by more than 50% to marginally improve 2019’s near-fatal decline. The question now is whether shares of Nio deserve to be parked in your portfolio?
Nio Stock Weekly Chart
Profitability for a growing company like Nio stock can be overrated. Market leaders Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN), which faced massive losses during their rise to prominence, are a testament to that notion. But running out of cash and having access to additional capital is obviously a more troubling situation. As much, NIO stock remains a more speculative trading vehicle.
Source: Charts by TradingView
Being a more-fragile risk asset than other companies isn’t to say Nio shares are off limits. But buyers of NIO stock should definitely approach and exit positions with extra care.
Following earnings Nio stock has affirmed a minor uptrend off its September all-time low. That’s the good news. But a larger downtrend from 2018’s all-time high is still intact after being challenged by NIO’s recent reaction high. Shares are also overbought and in a risky position. This observation is backed by price action which has pierced Nio’s upper Bollinger Band and an aggressive stochastics position that’s signaled a bearish crossover.
Weighing all of the evidence, I’m willing to give NIO the benefit of the doubt. However, Nio stock isn’t ready to be bought just yet. And if more attractive positioning does come about, strict discipline to containing risk needs to be upheld.
My advice today is to wait for a more meaningful pullback in the Nio stock price over the next one or two weeks. I’d like to see NIO shares closer to its newly developed “minor uptrend” before a buy decision is considered.
Of course, the reality is NIO stock may not offer an entry aligned with this approach. But if shares do continue to pull back constructively within the smaller uptrend, the odds for a much stronger entry are increased in our estimation. And bottom line: buying Nio’s emerging trend with this strategy means that a forced ejection below $2.25, if required, won’t feel or look like a car wreck in the trading account.
Disclosure: Investment accounts under Christopher Tyler’s management currently do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
