Oil Wars and Bear Markets Are Too Much for Nio Stock

The odds are moving rapidly against this wager

As a long-term speculative play, Chinese electric vehicle maker Nio (NYSE:NIO) appears like a solid pick. Prior to the market madness with the coronavirus from China, Nio stock was gaining impressive momentum. With trade talks between the U.S. and China culminating in a phase one deal, consumer sentiment in the world’s second-largest economy roared back. Frankly, the trade war was a terrible situation for businesses in both nations.

Oil Wars and Bear Markets Are Too Much for Nio Stock
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Unfortunately, as Nio stock gained back some of its lost ground, the coronavirus struck. Eventually, it brought many major cities in China to a standstill. Further, the Chinese government locked down Hubei province, ground zero of the pandemic. Of course, this disrupted supply chains for most industries, including the automotive sector. In our globalized economy, China now plays a pivotal role in how we move about.

However, the bullish argument states that the coronavirus is a temporary headwind. If it weren’t for this awful black swan event, Nio stock would have continued moving higher. Particularly at this time, I’m not interested in playing the “what if” game. That said, given recent developments, this broader thesis isn’t without merit.

Primarily, China, having apparently reached the tail end of its infection curve, is now focused on restarting its economy. Logically, everyone is also watching with anxious curiosity. After all, BNP Paribas chief China economist Xingdong Chen stated that the country must balance the need to rejuvenate its economy and protect its people.

Further, the move is a vital one for everyone else. With so many global businesses at a standstill, we all need China to quickly reboot. Even if it does that without hiccups, that might not save Nio stock.

Nio Stock Is Trading in an Unfavorable Market

For several years, China has charted a long-term plan for global influence (some would say dominance). But in NIO’s case, not everything is under its native country’s control.

A headwind that has impacted even the mighty Tesla (NASDAQ:TSLA) over the trailing 30 days is the oil price war. Waged between Saudi Arabia and Russia, the commodity conflict doesn’t appear to have an end in sight.

To make a very long story short, the two oil-exporting giants both have an economic incentive to mitigate their damages. From Saudi Arabia’s perspective, a cooperative production cut is the answer. However, Russia disagreed because it would hurt their own expansionary efforts. In retaliation, Saudi Arabia not only flooded the world with cheap oil, it’s targeting Russia’s customers with generous discounts.

For the average everyday consumer, this oil war translates to cheap gasoline. Theoretically, this benefits traditional automakers and not so much Nio stock. And in China, the oil war makes electric vehicles especially problematic.

First, we must consider that several major Chinese cities were originally built to accommodate bicycles, not cars. By deduction, many homes in these cities lack important infrastructure, namely garages. In ordinary circumstances, this imposes inconvenience to Chinese EV buyers. But in a pandemic, the flexibility of cheap gasoline further disincentivizes EVs.

Second, despite China’s efforts to jumpstart its economy, no one can deny a simple fact: it took a beating from the coronavirus. In fact, Goldman Sachs forecasts that China’s GDP may contract by 9% in the first quarter on a year-over-year basis.

Amid the downturn, the Chinese government is considering relaxing emissions standards to stimulate sales of older car models. If so, that could put a hurting on Nio stock.

Not About Thriving But Surviving

Again, despite the talk, China’s resumption of economic activity isn’t without serious risks. As Italy’s crisis demonstrates, you don’t want to treat this with a cavalier attitude. Thus, I imagine that there will be several limitations in place during this road to financial recovery.

Bluntly speaking, NIO was never a great candidate for stability. Instead, like many other technology firms, it eschewed that stability to maximize growth potential. That’s fine in a bull market where the name of the game is “keeping up with the Joneses.” But in a bear market? It’s all about survival.

Whether you look at NIO from long-established financial metrics to the broader fundamentals, this is not a company built for a war of attrition. Unless you anticipate a miracle occurring, I’d sit this one out.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/oil-wars-and-bear-markets-are-too-much-for-nio-stock/.

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