What an explosive move it has been in the electric car space. Nio (NYSE:NIO), Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) have all experienced powerful gains as of late. However, is Nio stock starting to get wobbly?
After some very powerful moves over the last few sessions — up about 60% in the prior week and up 36% in the week before that — Nio shares are starting to show signs that this rally may be getting extended.
However, it’s important to note that we can’t just blindly sell into moves like this. Whether the stock “deserves” these types of rallies doesn’t matter. They can go on for much longer than many investors expect.
Just ask Tesla shorts how well that has worked out for them thus far, with Tesla now commanding a $286 billion market cap.
It doesn’t matter if it’s deserved. What matters is the price action.
Trading Nio Stock
Since I mentioned the chart in the headline, let’s look at that first. Above is a weekly chart of Nio stock, highlighting the various ups and downs this name has suffered through.
Like most stocks, Nio was trading well in February but hammered in March as the novel coronavirus roiled equity markets and the global economy. Now, that doesn’t seem to be of any concern.
Nio began last week with a gap-up, as can be seen on the chart above. It powered higher on heavy volume and blew through the prior high at $13.80 from Q3 2018. With so much momentum in this concentrated group, I don’t want to be bearish without some type of confirmation.
So far, there isn’t bearish confirmation, but there are clues of waning momentum. On Wednesday, July 8, Nio stock gapped up to new highs, rallied 15.5% at one point, then fell more than 20% at one point from those session highs — all in the same day!
However, by taking out Wednesday’s high a few days later, it negated this potential topping/exhaustion pattern. However, shares have continued to gap up and closer lower, signaling that bulls may be running out of steam.
If shares can continue higher, look for a test of the 123.6% extension, up at $16.78. On the downside, see if shares lose the prior high, at $13.80. Below puts last week’s low in play at $10.70. In that case, it also puts a possible gap gill in play at $9.38, as well as $7.91.
Breaking Down Nio
Unfortunately, some investors will try to use logic to explain this move. Sometimes we just have violent moves in the stock market that fundamentals do not explain. From a valuation or fundamental perspective, there’s no reason why Tesla should have a $300 billion valuation.
There’s no reason why Nikola should have had a valuation of more than $25 billion at one point. Sometimes it just doesn’t make sense. And while short-sellers can make money in these cases, they can also lose it by being stubborn.
Obviously the electric car market is a big one — for those that can figure it out. Tesla has been a shining example of exactly what’s possible. I think that’s why Nio and Nikola are being bid up to such extremes despite not showing the types of results that would justify such a valuation.
It’s also noteworthy that while they technically can achieve what Tesla has done, they still have to compete with Tesla, as well as the rest of the automotive world. Nio operates in China, the largest car market in the world. But so too does Tesla, with its new Shanghai facility.
The Bottom Line
While Nio deliveries grew 190.8% year-over-year in Q2, the company delivered just over 10,300 vehicles.
I’m not trying to be overly critical, because what Nio is doing is very difficult. But to value the company at almost as much as a company like Fiat Chrysler (NYSE:FCAU), as it unprofitably delivers 10,331 vehicles, I believe misses the mark.
In so many words, I do not think the fundamentals justify the valuation for any of these three electric car makers. That said, let the technicals tell you when the ride is over. If one shorted Nio stock on Friday, July 2 because the run seemed unreasonable, they were down 70% a week later. Just something to keep in mind.