As the busy earnings season gets underway in broader markets, I’d like to discuss the outlook for China-based electric vehicle maker Nio (NYSE:NIO). Over the past two months, the value of shares tripled. In late May, the price was shy of $4. On July 6, it hit a 52-week high of $12.20. Currently, NIO stock is hovering at around $14.
Put another way, year-to-date, NIO stock is up about 185%. For comparison, SPDR S&P Kensho Smart Mobility ETF (NYSEArca:HAIL) is up about 11% in the same period. Nio is that exchange-traded fund’s second-biggest holding, at 4.1%, of the 58-stock portfolio.
Now, market participants are wondering whether they should expect the run-up in NIO stock to continue in the third quarter. If you have participated in the recent stellar run, you may want to take some money off the table. I expect short-term profit taking to push the shares below $10. Here’s why.
Why NIO Shares Skyrocketed Recently
Chinese economic development has been the main driver behind the growth of the car industry in China, including electronic vehicle (EV) sales. Since its start in 2014, the Nio has been touted as the Tesla (NASDAQ:TSLA) of China.
Yet Nio is still a relatively young company which has been experiencing growing pains, especially over the past year. And its operations have not become fully sustainable.
However, on July 2, the group released its June sales which showed that the sales numbers were up 179% YoY. The group delivered 3,740 vehicles in June, which was a new monthly record. And for the second quarter, sales were up 191% from the same period in 2019. Investors cheered the report and NIO stock hit a 52-week high the next trading day.
The group currently sells cars exclusively in China. Its two main models are the ES8 (a seven-seater SUV) and the ES6 (a five-seater SUV). Cumulative deliveries of ES8 and ES6 reached 46,082.
Furthermore on June 29, management announced substantial capital injection in the company, as was previously disclosed in April and May. Many long-term investors feel that management can now focus on execution and delivery as opposed to short-term financial worries.
In previous quarters, analysts noted noted the car maker was burning through a large amount of cash. In late April, Nio management announced a capital partnership with a group of China-based strategic investors, including the local Hefei government. Nio is in the process of establishing headquarters in the city’s economic development region as Nio China. And is giving up a stake of the business to the strategic investors.
What Could Derail NIO Stock Short-Term
In recent days volatility has increased in broader markets. And we are entering a busy earnings season. If markets come under pressure in the coming weeks, then NIO stock will likely be adversely affected, too.
Are you also an investor who follows technical charts? If yes, then you may be interested to know that the short-term oscillators have become overbought. Therefore, the NIO stock price may quite easily go below $10.
Do you currently hold any paper profits in the stock? If yes, then you may want to ring in the cash register soon.
China is now the largest EV market in the world. If the country were to release any weakness either in terms of its economy or car sales, then investors in Nio would not hesitate to hit the “sell” button, either.
Bottom Line on NIO Stock
Most investors would agree that we do not yet have the full economic picture on the demand and supply effects of the COVID-19 outbreak in many countries. But we can expect EV companies in China like Nio to be rather vulnerable, especially if a second wave of the outbreak gets underway.
Therefore, if you are currently a shareholder, you may want to de-risk at this point.
From a long-term valuation standpoint, Nio stock would look more attractive around $8 or below.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.