Now that shares have gone parabolic, can Nio (NYSE:NIO) stock head even higher? Shares are up 55.3% in the past five trading days alone. Year-to-date, shares in the Chinese EV (electric vehicle) maker are up a staggering 262.4%.
As EV stocks like Tesla (NASDAQ:TSLA), Nikola (NASDAQ:NKLA), and Electrameccanica Vehicles (NASDAQ:SOLO) set the world on fire, Nio is joining in on the fun.
But is the recent price action in EV stocks driven by actual results? Or has the “Robinhood set”, along with momentum traders, simply chose “green wave” stocks as their latest speculation vehicle?
Perhaps, a little of both. Touted as the “Tesla of China,” Nio has the potential to become a dominant EV player in its home market. Even as Tesla has built up a massive presence in China as well.
On the other hand, you can argue that FOMO, momentum, and other non-fundamental factors are what’s driving today’s price action. Yet, markets can stay rational longer than you can stay solvent. A company valued on hype, not fundamentals, can easily become even more overvalued.
So, what’s the play here? Let’s dive in, and see why it may be best to avoid going long (or short) this stock right now.
Looking Beyond the Hype With Nio Stock
Nio’s epic move higher is largely on the heels of the recent strong performance of Tesla stock. But, like its better known rival, this company also wowed investors with its June delivery numbers. Earlier this month, the company announced it sold 3,740 vehicles during June. That’s an 179% increase from the prior year’s month.
Second-quarter (ending Jun 30) vehicle sales were 10,331, up 191% from the prior year’s quarter. Granted, these strong results show that the company may have a shot at becoming a formidable player in the Chinese EV market.
Does selling a few thousand more cars year-over-year justify adding billions to its valuation? Sure, there’s more to this company than with other non-Tesla electric vehicle plays.
Take, for example, Nikola. Nikola has yet to start producing cars, but sports a $20.5 billion market cap. With this in mind, the current market value of Nio ($17.2 billion) looks downright reasonable.
However, having to point out an even more irrationally-priced peer to justify its valuation underscores the fact that EV stocks are in a bubble. And, while a bubble can last longer than expected, you never know when the music is going to stop.
Should You Buy EV Stocks in the Midst of A Bubble?
As a Barron’s article put it July 9, there’s no denying that the recent price action in electric car stocks is largely due to the “Robinhood effect.” In other words, as more users of the stock trading platform jump into major EV names, their respective share prices keep climbing higher.
So, does this mean their shares have gotten ahead of themselves? That’s the take of InvestorPlace’s David Moadel, who wrote on July 6 why it may be time to take profits on Nio stock. In his article, Moadel pointed out how the stock snapped back hard the previous times shares went parabolic.
That’s not to say they’ll will fall back to their lows (under $2 per share). But, if more traders take profits, the stock could pull back to the single digits. Buying today, as shares hit $15 per share, may not be worth the risk.
But, that’s not the only major red flag to consider. Back in May, a longtime Nio stock skeptic laid out the case why the stock may be worth significantly less ($1.30 per share) than where it trades today.
Yet, the rationale behind this bearish take (dilution due to a recent restructuring) may have weakened in the months since. How so? With its stock price surging, the company can more easily raise the capital needed to meet its obligations, without seriously diluting current shareholders.
In short, don’t bet against Nio right now. Even if there are solid reasons (besides valuation) to short this stock, the current EV bubble may leave you exposed to too much risk if shares continue to climb.
Hold Off on Nio Stock For Now
Can this too-hot-to-touch Chinese EV play head to new highs? With the current electric vehicle stock bubble, it’s possible. But, going long today is more a gamble than a solid investment. That being said, the risk shares continue to irrationally climb higher means going short is out of the question as well.
So, what’s the call? Too speculative to buy, and too volatile to short, simply stay on the sidelines with Nio stock.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.