Congratulations, Nio Is Now Officially in Bubble Territory

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Last week I authored a cautionary note about Nio (NYSE:NIO) shares getting a bit frothy. Since that time, the Nio stock price has continued to skyrocket.

Nio Stock May Actually Be Worth the Gamble This Time
Source: xiaorui / Shutterstock.com

Should I feel like a silly goose for recommending that investors take profits when they could have held on for more gains? Listening to what I call “hindsight quarterbacks” isn’t productive, but their criticism is understandable.

The important thing is to understand the contributing factors behind the relentless move investing in Nio. By putting the price action in context we can get a sense of where the share price might be headed. Additionally, we’ll be better prepared to assess whether the risk-versus-reward profile is favorable at this point.

A Closer Look at Nio Stock

Examining the price action in Nio will be instructive as it parallels the trajectory of a couple of very well-known peers in the electric-vehicle market. Specifically, the recent ascent of Nio shares largely mirrors those of Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA).

In fact, NIO seems to have taken the moves in TSLA and NKLA and magnified them. That’s possible for a couple of reasons. First, NIO is a low-priced stock, which allows for sharp, sudden price moves.

Second, practically everybody assumed that Nio, as a company, was in deep trouble a few months ago. That profound pessimism proved to be a setup for the subsequent stunning relief rally in Nio investments.

Suffice it to say that the share price has tacked on more than 400% since it bottomed out in early April. Moreover, the stock price more than doubled from $6.90 on June 26 to nearly $15 on July 10.

The upward trajectory only seems to steepen more and more. It’s possible that, for the summer at least, NIO is a bigger bubble than TSLA and NKLA combined.

After the Slump Comes the Jump

Since Nio’s vehicle deliveries were anemic during the peak of the novel-coronavirus crisis in China (which happened earlier than it did in the United States), the setup for a marked improvement in June was already there.

Indeed, when it comes to June deliveries, Nio delivered. The stats are inarguable: 3,740 vehicles delivered in June, signifying a year-over-year improvement of 179% as well as Nio’s best monthly-deliveries total ever.

Plus, Nio had its best quarter in the company’s history in terms of sales. To be more specific, Nio sold 10,331 vehicles during the quarter that ended in June, representing a 191% year-over-year increase.

Understandably, Nio CFO Steven Feng indulged in a bit of a “humble brag” upon the release of these encouraging stats. “Our deliveries in the second quarter of 2020 exceeded the high end of our earlier projection, and we are confident that our goals on gross margin and operational efficiency will be achieved,” projected Feng.

As Tesla Goes, So Will Nio

Nio’s quarterly results are all fine and good, but let’s not discount the importance of valuation. No improvement in delivery figures can mask the fact that Nio’s trailing 12-month earnings per share is an alarming -$44.1.

When the per-share earnings are negative and far greater in absolute value than the share price itself, that’s a glaring red flag. What we witnessed in Nio’s quarterly results was improvement, but not profitability.

We also have to consider the possibility that NIO is simply following TSLA. Miller Tabak Chief Markets Strategist Matt Maley’s critique of Tesla bulls’ enthusiasm could just as easily be applied to Nio’s fanatics:

“But stocks like this after they have rallied a lot that’s a bubble. And to me, that tells me people should take at least some profits off the table and be careful about buying the stock at these prices.”

Maley’s concerns about the TSLA share price will, most likely, fall on deaf ears. The same could probably be said about my admonition on Nio, but if I can reach some overeager traders, then perhaps I’ve accomplished more than the usual feather-ruffling.

The Bottom Line

There’s no denying that a frothy Nio stock can always get frothier. Thus, this recommendation to take profits will, once again, likely be early.

If hype prevails for another week, you have my sincerest apologies. And if sanity prevails, I hope you liquidate your position before gravity sets in.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/congratulations-nio-stock-is-now-officially-in-bubble-territory/.

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