Somehow Chinese electric car manufacturer Nio (NYSE:NIO) has seen its stock spike. After opening at $3.54 on Monday, Nio stock is up more than 27%, settling in at around $4.27 at yesterday’s close. Some of that is explicable in terms of Tesla (NASDAQ:TSLA) and last week’s other big news.
One of the biggest financial stories of the past week has been Tesla’s explosive growth; it’s up over 36% since last Friday’s close. The other is the coronavirus outbreak, the epidemic that is sweeping China and hammering its stock market. You could also add plunging auto sales to China’s economic woes.
Given that NIO went into 2020 down 60% from its 2019 (and all-time) high, and the company is facing the double-whammy of coronavirus and plunging auto sales, why the sudden enthusiasm? And what are the odds this fire under Nio stock is going to continue?
The Tesla Effect
Tesla has had a very good run since the end of January. An earnings beat along with production ramp-up of the new model Y saw Tesla shares pop 10.3% to hit a new record high last Thursday.
That high didn’t last long, as Tesla continued to climb. Predictions that Tesla could hit $1 trillion in revenue in a decade lit a match under the stock on Tuesday, where it gained as much as 23% before settling down for a 13.73% gain — and another record close.
Nio is often referred to as the “Tesla of China,” and in this case, it has completely lived up to the name. It appears that investors are projecting Tesla’s success on the broader electric car market, bringing Nio along for the ride.
Big Concerns on the Horizon for Nio
Tesla is showing naysayers that electric car companies have huge potential. However, Nio is not Tesla, and Nio is operating in a Chinese market that faces some huge challenges.
Coronavirus is wreaking havoc on the country and dealing a heavy blow to the Chinese economy. The effects include production shutdowns and retail sales slowdowns.
The two factors are combining to make things even worse for Nio. Chinese car sales, in general, have been in a slump, and EV sales took a hit when China cut subsidies to buyers of the vehicles in half last June. According to Bloomberg, the country was already on track for a third straight year of declining auto sales.
However, the coronavirus has the potential to drag down full-year Chinese auto sales by an additional 5%, resulting in an annual decline as high as 20%.
EV sales are expected to be hit the hardest. Why? Because the biggest market for electric cars is large cities — and it’s large cities that are feeling the impact of the coronavirus outbreak.
Making the situation even tougher for Nio in 2020 is Telsa. The American EV maker opened its Shanghai Gigafactory in December and will be ramping up production through 2020, bringing serious competition against Chinese EV companies.
Bottom Line on Nio Stock
Last year was a disastrous for Nio. A seemingly non-stop parade of bad news drove the company’s stock down 60% from its high of $10.16 in early March. It saw modest recovery through the fall but remained volatile. It was coming off a 27% drop over the course of 10 days in January before hitching a ride on the TSLA train.
Nio faces real challenges in 2020. The coronavirus has the potential to cause devastating and lasting harm to the Chinese economy. That’s not good when you’re selling luxury EVs.
In addition, auto sales in that market were already slumping and on track for a third straight year of decline. Again, not good news if you are a Chinese automaker. And now Tesla is producing cars in the country.
In other words, don’t take the recent spike in Nio stock as a signal to jump in before it really takes off. The spike in NIO this week has a spillover effect from TSLA’s performance written all over it, and that is going to be short-lived.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
