Why Nio Stock Looks Risky

U.S.-based electric vehicle (EV) stocks have cooled off in recent weeks. But nothing’s stopped the epic run of China-based EV play Nio (NYSE:NIO). I’ve long been skeptical about Nio stock, and I’ve been weary of the sentiment that it’s well on its way to becoming the “Tesla (NASDAQ:TSLA) of China.”

Nio stock
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Yet, after Nio rebounded from the brink earlier this year, I concede that this “story stock.” is more than just hype. With Nio’s delivery growth trending over 100%, the stock’s doubling since Oct. and its roughly 1,200% rise since May 5 may not be the product of irrational exuberance after all.

And now, with Citigroup analysts saying that NIO stock has big tailwinds ahead, can one of 2020’s most successful stocks keep on winning? Even now, its outlook remains debatable.

On the one hand, it’s clear that bears (like myself) got Nio wrong from the get-go. At first glance, the company seemed similar to many “China stocks,” with multiple red flags. But the company’s stunning turnaround has proven that perception wrong.

On the other hand, Nio remains one of the few pure-play Chinese EV stocks available to U.S. retail investors. That means many are still willing to pay for Nio’s growth, just to gain exposure to the Chinese EV megatrend. Sure, “growth at any price” remains the market’s mantra. But Nio’s “bubble mode” (where its stock is right now) can’t last forever.

So what does this mean for investors who missed Nio at lower prices and want to jump on the wave? Mr. Market has proven the bears wrong. But, with the shares now more “too hot to touch” than ever, it’s wise to tread carefully with this name.

Nio Stock, Its Epic 2020 Rally, and What’s Next

For Nio’s true believers, it’s been a very profitable year. But, as 2021 approaches, has this ship sailed? Or can investors buy the shares now and still have potentially realize strong gains in 2021?

The shares probably won’t soar another 1000%. Sure, a month ago (when the shares were around $21, versus around $44 today), some, including me, were saying that Nio stock was being priced like Tesla in 2013.

And, as InvestorPlace columnist Mark Hake recently wrote, the company’s exponential sales growth could continue. In other words, it could report sales of $11 billion in 2021, versus around $2.1 billion this year.

But, given that the highest estimate by a Wall Street analysts for the company’s 2021 sales is $5.1 billion, the idea that Nio can continue going from zero mph to 60 mph and accomplish in a few years what it took Tesla about a decade to pull off seems a bit far-fetched.

Granted, I concede that if the company’s 2021 sales do exceed $5 billion, its shares could double again. Yet, while there’s plenty now to like about Nio, there could be some merit to a more bearish view of Nio stock at today’s prices.

The Risk/Return Ratio Is Unfavorable

Again, the bears missed the mark on this stock. Yet that doesn’t mean that investors can buy the shares today and expect a clear path to further gains in the near-term.

It’s true that, thanks to the growth of China’s EV sector, along with Nio’s battery and European expansion catalysts, there’s plenty in play to sustain the company’s current rate of growth. That, in turn, should help fuel another epic move by Nio stock.

However, the expectation of continued rapid growth is more than priced into the shares. What if the company experiences some hiccups again, as in 2019? Or what if its growth cools in the coming quarters?

If any of those scenarios start to play out, expect big near-term losses by Nio stock. Analysts may still be, on the whole, bullish on the stock. But their average price targets  indicate that the shares could fall to prices well below where they change hands today.

Of course, a massive dip by Nio stock could be good news for those looking to enter a long-term position in the stock. But for now,  the stock’s risk/return ratio is quite negative.

The Party’s Not Over Yet, But Exercise Some Caution

It is risky to buy Nio at today’s near-record prices. The company could continue seeing its growth accelerate, generating another round of outsized returns.

Yet, since expectations are now priced into the stock more than ever, even a slight hiccup could fuel a massive pullback, meaning big downside risk for those buying the shares today.

But such a selloff could create a great entry point for those who missed the boat on Nio stock earlier this year. So what’s the verdict? The “story” behind this “story stock” hasn’t ended yet, but be careful with Nio at such high levels.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

Article printed from InvestorPlace Media, https://investorplace.com/2020/11/nio-stock-floor-gas-hit-brakes-it-depends/.

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