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Is It Time to Get Off or On Nio’s Wild Ride?

Nio’s business is booming but its losses ought to make you think twice about its stock  

There’s a saying that fortune favors the bold. Nowhere is this more true than with Nio’s (NYSE:NIO) performance in 2020. Nio stock was left for dead last fall. The novel coronavirus delivered more pain in March.

nio stock
Source: Carrie Fereday / Shutterstock.com

Yet, a billion dollars in funding from the Hefei municipal government in China, not to mention some very healthy monthly sales numbers post-Covid-19, has the electric vehicle maker’s shares flirting with an all-time high of $15.73, 550% higher than where it started the year.

I’d been entirely skeptical of Nio’s ability to weather its financial storm earlier this year but management has solved its near-term cash crunch while putting it on the pathway to exponential growth.

It’s not often that I’m 100% wrong about a company but Nio’s pretty darn close. Thankfully, the one thing I’ve learned from writing about stocks is that situations change — sometimes, as is the case with Nio, for the better.

So, now, as Nio makes its way to $20, investors who’ve been so bold (I wasn’t one of them) are probably wondering if they should buy some more. Or, conversely, they’re sitting on a one-month annualized return of 1,536% and wondering if taking profits is the wiser choice at this point in the game.

Is it time to get off or on Nio’s wild ride? I’ll look at both sides of the argument.

Nio Stock Is More Than Ready for $20

My last article about Nio was June 24. At the time it was trading at $6.86. I felt that a double-digit share price in 2020 was definitely in the cards. Since then, NIO has gained in 10 out of the last 12 days of trading. As I write this on July 13, it is up more than 8% in early trading to $16.26.

If the momentum keeps up, Nio could hit $20 by the end of this week. How crazy would that be for a company that loses more than a billion dollars annually?

Well, as a Tesla (NASDAQ:TSLA) admirer, I know what it’s like to see an innovative company shake off the naysayers until it was able to make money consistently. It appears that Nio might be following the same pathway to profitability.

Until it makes an operating profit, the Nio bears will continue to argue that its share price is way overcooked at 14 times sales. By comparison, Tesla’s price-to-sales ratio is a tad under 11.

However, it’s hard to ignore the fact it delivered a record number of vehicles in June (3,740), and in so doing, delivered 10,331 vehicles in the second quarter, the first time it’s ever delivered more than 10,000 in a quarter. The momentum is real.

More importantly, these numbers come only a few months removed from China’s Covid-19 lockdown. It’s managed to get back to full speed in record time. That bodes well for the future.

A $10 Share Price Seems More Realistic

InvestorPlace contributor Tezcan Gecgil recently stated that investors might want to take some profits due to the uncertainty surrounding the global economy. For her, $8 seems like a more realistic entry point on the stock.

She argues that the earnings season we’re entering could deliver devastating news about Covid-19 and what it’s doing to businesses of all sizes. The uncertainty surrounding the earnings season is likely to increase volatility for all stocks, including Nio.

“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,” Gecgil wrote on July 9.

“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.”

I’m not a technical analyst but there is bound to be a significant number of negative surprises during earnings season. Nio’s expected to report its Q2 2020 earnings in mid-August. While sales have been on fire, investors will be more concerned about what that’s meant for the bottom line.

If the losses are seen to be accelerating, the same doubts investors had about Tesla will surface for Nio.

The Bottom Line

If you bought Nio stock for the long haul (three to five years), I wouldn’t sell at this point. However, I would buy some more if it drops into the low teens.

Until Nio’s growth game comes to an end, I would not get off its wild ride. As for those who haven’t bought just yet, I think my colleagues are right about getting a better entry point to buy its stock.

By fall, Nio could be back into the low teens. However, barring something unforeseen in Nio’s mid-August earnings report, I would consider buying for the long haul.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/time-to-buy-sell-nio-stock/.

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