Chinese electric vehicle manufacturer Nio (NYSE:NIO) indubitably had a rough start to the year. Yet, after a few months, the number of vehicle deliveries improved dramatically. As a result, Nio stock pushed higher. Skeptics might actually say it went too high.
The naysayers have a valid argument. In hindsight, we now know that the rise in Nio stock was so steep that a pullback was almost inevitable. After all, one of my main trading tenets is that you must not chase after sky-high prices.
So, is Nio stock simply taking a breather? Or is this a healthy pullback and a setup for the next leg up? By examining the facts surrounding the company and the stock, we can make a more informed judgment and act accordingly.
A Closer Look at Nio Stock
Surely it’s not a coincidence that Nio stock has, to a certain extent, followed the trajectory of global electric vehicle market leader Tesla (NASDAQ:TSLA). We’ve also witnessed similar behavior in Nikola (NASDAQ:NKLA) and some other electric vehicle stocks.
Is this nothing more than a big game of follow-the-leader? The correlation between Tesla stock and Nio stock isn’t 100%, so I wouldn’t draw that conclusion.
What we can conclude with certainty is that the last two times it went nearly vertical, Nio stock pulled back. When Nio shares went parabolic in July, I warned traders that the price move was too sharp.
I won’t claim that I called the short-term top perfectly, but I was pretty close in that instance. A steep drop followed that price spike, and we’re seeing a similar spike-and-pullback scenario playing out in early September.
If July’s pullback turned out to be a setup for higher prices in Nio stock, then perhaps the early-September slump could also be a springboard. And if we see a similar pattern to what took place in July and August, then the next stop for Nio stock might be $24 or $25.
It’s Not All About Tesla
Nio stock holders experienced tremendous gains in August. It’s tempting to attribute this run-up to the “Tesla effect.” Surely it’s not a coincidence that the two stocks went up in tandem.
Yet, at the same time we should give credit where it’s due. For the month of July, Nio’s vehicle deliveries marked a jaw-dropping 322% year-over-year increase.
On top of that amazing performance, the Nio share price received a well-earned boost from a prominent market authority. Specifically, UBS analyst Paul Gong upgraded his rating on Nio stock from “sell” to “neutral.”
At the same time, Gong increased his price target on Nio stock from $1 to the much more realistic $16.30. Even during Nio’s darkest days, $1 was too harsh of a price objective. It’s good to see a pessimist change his tune on Nio stock, and this should provide encouragement for the company’s stakeholders.
An Awesome August
But has Nio been able to maintain its pace of vehicle deliveries? The market recently received the answer to that question, though the reaction was unusual.
During the month of August, Nio managed to deliver 3,965 electric vehicles. That’s a 104.1% year-over-year improvement. Furthermore, it’s Nio’s best monthly vehicle-delivery total ever.
In spite of all this, the Nio share price fell after the data was released. Was this Nio’s fault in particular? Not likely. The most logical explanation is that Tesla shares were pulling back after that company’s five-for-one stock split.
This seems to have precipitated a pullback in other electric vehicle stocks as well. So, investors shouldn’t conclude that there’s something wrong with Nio. And, this could be a perfectly buy-able dip, not unlike the one that occurred in July.
The Bottom Line
When stocks retreat to a moderate degree, that’s not always a bad thing. In the case of Nio stock, it’s your chance to add to your position in anticipation of another leg up.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
