Nio (NYSE:NIO) has been a phenomenal stock so far this year, rising 960% in 2020. However, the stock has had momentum simply because its business has had momentum.
While automakers typically struggle during recessions, the economic issues brought on by the novel coronavirus are hardly traditional. It’s very difficult to invest through periods in which there is no real comparable period to draw lessons from.
In any regard, Nio has been crushing estimates and delivering strong results. But its stock has done more than just that, delivering a growth experience that has changed some investors’ lives.
Is Nio’s Run About to End
How did Nio deliver a life-altering run? Nio has a 52-week low of $1.66. If we go back a little further, to Oct. 2, 2019, Nio has a low of $1.19. Fast-forward about 13 months and the stock is up roughly 3,500% even after accounting for Friday’s 7.75% drop.
At one point on Friday, Nov. 13, shares were up more than 12% and once again hitting new all-time highs.
However, the stock quickly reversed those gains on news from Citron Research. The well-known short-seller did not attack the stock with a painful short report. Instead, Citron said it was taking profit on the name after getting bullish on Nio roughly two years ago.
“It is time for investors to rotate out of Nio,” Citron said. “Enjoy your profits and look for the next disruptive technology.” With that, Citron assigned a $25 price target on Nio.
Admittedly, Nio’s business still remains attractive because it still has momentum. But how long can that momentum justify the rising stock price?
Even with Friday’s reversal, we’re talking about a $60 billion market capitalization for this name. That makes Nio more valuable than Ford (NYSE:F), General Motors (NYSE:GM) and Fiat Chrysler (NYSE:FCAU), the maker of Jeep and Ram trucks, among others. It also makes Nio worth more than Ferrari (NYSE:RACE).
Breaking Down Nio
When Nio last reported earnings in August, the company beat on top- and bottom-line estimates. On the revenue front, sales of more than $535 million beat expectations by almost $34 million and grew more than 150% year over year.
Nio also had record-high quarterly deliveries, which rose 190.8% to 10,331 vehicles.
Gross margins made up material ground too, coming in at 8.4% versus a loss of 33.4% in the same period a year ago. Vehicle margin of 9.7% was well ahead of last year’s Q2 loss of 24.1%.
For Q3, management expects an even better quarter, with deliveries landing between 11,000 and 11,500. Guidance was ahead of expectations, too.
So there is clearly momentum here. I don’t think anyone — even the bears — are arguing that fact. When this momentum eventually breaks in the business, it will likely deal the stock a swift blow.
That’s because the valuation doesn’t justify its current operations. With consensus 2020 revenue estimates sitting at almost $2.3 billion, we’re talking about a stock trading at 26 times this year’s sales. That sounds a lot more like a tech stock than an automaker.
Obviously investors are forward-looking, but at one point does the valuation disregard expectations for 100% revenue growth this year and 80% growth in 2021?
One could point to Tesla (NASDAQ:TSLA) and make the case for a higher valuation for Nio. However, I would argue that Tesla is worth a premium due to a number of catalysts. Those include global growth, being well-capitalized and having a huge opportunity in energy.
Nio has a large total addressable market (TAM) in China, but so too does Tesla. And now Tesla is setting up shop in Europe as well.
Trading Nio Stock
Make no mistake about it: I’m no bear on Nio.
The company has tremendous momentum right now and solid momentum forecasts for the foreseeable future. Like Tesla, Nio has also taken considerable steps to improving its balance sheet, removing investors’ largest concern.
When the company reports earnings on Nov. 17, it will likely be quite telling for the short term. It will either confirm bulls’ belief about the future or it will cast more doubt over its current valuation.
If the reaction is bearish, let’s see if Nio can find support in the $37.50 to $40 area. That will have the stock down anywhere from 25% to 30% from its high. Below that and the 20-day moving average will be the first area of support, followed by $30.
If we do get a 50% correction in Nio, shares will still look pretty healthy so long as the 50-day moving average holds.
On the upside, look for a rotation back up through $50. Above that opens the door to the highs near $54.20 and the 423.6% extension up at $54.61. A pullback or consolidation would be healthy at this point, though.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.