Nio Could Head Lower, But Be Careful Going Short

As I discussed earlier this month, it’s hard to tell what’s next for Nio (NYSE:NIO) and Nio stock. On the bull side, things may be just getting warmed up. After beating Wall Street’s quarterly delivery forecast, it’s clear this Chinese electric vehicle (EV) name could become a formidable player in its home market. Even as rivals like Tesla (NASDAQ:TSLA) have gained massive market share in China.

Nio stock
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On the bear side, you can argue it’s momentum, FOMO, and other non-fundamental factors driving Nio shares right now. With Tesla’s recent success, investors have piled into any stock associated with EVs. Not only this stock, but names like Nikola (NASDAQ:NKLA) and Plug Power (NASDAQ:PLUG) as well.

But, all have pulled back from their recent highs. If the “Tesla factor” diminishes, and investors take profit, shares in the non-Tesla EV names could take a breather in the near term. In other words, going short is starting to look tempting.

Even so, betting against the major EV names remains a high-risk move. Even as each of them trades at a more-than-frothy valuation.

Why? If and when ebullience for Tesla does a 180, expect big declines across the board for electric vehicle stocks. But, in the meantime, the “EV story” (that electric vehicle makers are fast making legacy car makers irrelevant) still holds. In other words, this “too hot to touch” EV stock could not only bounce back to recent highs, but head even higher.

Cracks in the Bull Case for Nio Stock

With EV stocks surging earlier this month, you’d think that the Chinese EV market is red hot right now. But, based on a recent article in the Wall Street Journal, this isn’t exactly the case. According to WSJ, “new-energy vehicle” (which includes hybrids) sales fell 33% in June.

Granted, the premium market (where Tesla and Nio operate) saw gains. But, with not just Tesla, but legacy car makers like BMW (OTCMKTS:BMWYY) entering the scene, the company has its work cut out for them.

In short, unless Chinese EV demand rapidly catches up, it’s hard to say whether Nio stock can grow to their valuation. And, if results in the coming quarters fall short of expectations, shares of the company could fast fall back to the single-digits.

With this in mind, there’s good reason why most analyst price targets remain far below where shares trade today. Yet, while there’s potential for shares to fall back from today’s prices to prior price levels (under $5 per share), the short case for Nio stock is no slam-dunk.

Despite Rich Multiple, Shares May Be Reasonably Priced

With the company still largely in the development stage, it’s a tough stock to value. Traditional valuation metrics, like price-to-sales and price-earnings may not be relevant. It’s tomorrow’s potential, not today’s results, that people are buying when they enter a position in Nio stock.

So, what could Nio be worth down the road? Recently, InvestorPlace Markets Analyst Luke Lango ran the numbers. Based on his calculations, Lango estimates the company could be generating $1.50 per share in earnings by 2030. Assigning shares a market-average multiple, and discounting back to 2020, he estimates shares to be worth around $12.25 per share at present.

In short, the stock today isn’t overvalued, or undervalued, but accurately priced given its upside potential. So, what’s the trade then?

Depends on how you look at it. If you are bullish on Nio stock, waiting for shares to pull back, then buying (Lango’s recommendation) may be the way to go.

If you’re bearish, you could make quick profits entering a short position at today’s prices. As Robinhood traders and other speculators take profit, shares could fall back to $5 per share as the “EV bubble” takes a breather.

Yet, there’s no guarantee going short today will pay off. As seen over the last few months it’s the story, not valuation or fundamentals, driving Nio stock. And the next page has yet to be written.

Bottom Line for Nio Stock

It’s safe to say EV stocks are in the midst of a bubble. And, while some shrewd traders may be able to make quick gains shorting at today’s valuation, covering at lower prices as EV exuberance cools, this name in particular isn’t the strongest short opportunity.

Granted, you can make a pretty strong bear case for Nio shares. As this commentator wrote back in May, the company’s partnership with a Chinese municipality may mean the stock’s underlying value is could be as little as $1.30 per share.

But, given the recent strong results coming out of Tesla, the EV bubble could continue. So, what’s the verdict? Nio stock could head lower short term, but it’s still too risky to go short.

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.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/nio-stock-head-lower-dont-go-short/.

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