Just when you thought NIO (NASDAQ:NIO) stock had finally made the turn higher and it was finally safe for bottom fishing, the one-two punch of a market crash and underwhelming earnings arrive to spoil the fun.
To be fair, there were a good few months from November through February where bulls could have pulled out profits. Those that have overstayed their welcome, however, are seeing the gains rapidly unravel.
NIO shares are down almost 45% in the past month alone.
Today we’re breaking down the nasty rug-pull and identifying the levels to watch in the aftermath of its underwhelming earnings report.
Swing and a Miss
Traders hoping for a repeat to last quarter’s magical reaction to earnings were sorely disappointed last week. The Shanghai-based automotive company known for its electric vehicles reported a net loss of 39 cents per share on $409.1 million in revenue. Wall Street analysts were forecasting a loss of only 36 cents on sales of $412.5 million, so NIO whiffed on both fronts.
Even more concerning is the company’s dwindling bank account. The $274.3 million that NIO had at the end of September has shrunk to $151.7 million as of December and threatens its ability to continue operations.
The coronavirus is further hampering production capabilities as factory shutdowns disrupt supply chains. Nio noted that “the China auto industry in general and the production and delivery of vehicles of the company have taken a hit for the first quarter of 2020.”
NIO Stock Charts
Shares fell 16% on the day earnings were posted, and it has floundered ever since. The uptrend that began in November and carried the stock up as much as 375% is being dismantled. With this month’s crash, NIO stock has now lost all of the outsized gains scored after December’s report.
With shares now below the 20-day, 50-day, and 200-day moving averages, I see zero technical reasons to get involved here. Downside momentum increased on the latest drop and confirms sellers are growing in strength. Per the grim fundamental commentary above, it’s also difficult to justify a bullish trade here based on earnings and sales data.
And don’t let the cheap price tag sucker you in. Even at $2.33, NIO stock can go a lot further. The 52-week low is at $1.19, or roughly 50% lower.
The stock is likely hard to borrow at most brokers right now, so if you’re considering a bearish trade, long puts are your only option. I’d prefer the stock consolidated for a few more sessions to build a low base pattern. Then you could buy puts when/if it takes out the low (currently at $2.11). That said, puts are trading pricey right now, so you’ll need a substantial drop in the stock to see a modest profit.
The Trade: Buy the May $2.50 puts on a break of $2.11.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!