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Nio Stock Has Skyrocketed in 2020, But High Risks Remain

Looking for stocks that have performed exceptionally well in 2020? Nio (NYSE:NIO) stock has an incredible performance in 2020. NIO stock has a year-to-date performance of over 1,200%, and a one-year performance of over 2,200% as seen on MarketWatch. The main question is whether Nio stock is worth buying now.

Image of Nio (NIO) logo branded on the exterior of a corporate building.

Source: Sundry Photography / Shutterstock.com

For this article on Nio stock, I will focus on one specific simplified way to analyze stocks in 12 steps, a method called the Nasdaq Dozen, which was suggested by Nasdaq  several years ago. What I like about this method to analyze stocks is that it is fast and easy, yet thorough and focusing on things that matter.

What matters in investing in any stock? Revenue, profitability, growth, and valuation are some of the main points to start with. The Nasdaq Dozen is:

  1. Revenue
  2. EPS, or the Earnings per Share
  3. ROE, or the Return on Equity
  4. Analyst Recommendations
  5. Earnings surprises
  6. Forecasted growth
  7. Growth in earnings
  8. The PEG Ratio
  9. Earnings of the industry
  10. Days to Cover
  11. Insider Trading
  12. The Weighted Alpha

Is the Nasdaq Dozen method the best way or most complete way to approach investing in stocks? No, but it is a good start, and it has plenty of credibility, and a lot of due diligence.

NIO Stock: The Nasdaq Dozen Method

For each of the 12 steps, a passing or failing score is awarded. The main concept is that the more points a stock gets out of the maximum 12 points, the more confidence it inspires to invest in it. So let’s analyze Nio stock this way.
1. Revenue

Revenue gets a passing score if revenue is increasing. In 2019 the revenue was $1,123 billion compared to $721 million in 2018, so a passing score is given.

2. EPS

EPS gets a passing score if the EPS is increasing. Nio has losses over the past two consecutive years, so a failing score is given.

3. ROE (Return on Equity)

ROE gets a passing score if ROE has been increasing for two consecutive years. Again Nio is not profitable for 2019 and 2018 so a failing score is given.

4. Analyst Recommendations

Give analyst recommendations a passing score if the consensus recommendation is a buy or strong buy. Based on only two analyst’s recommendations for NIO stock in the last month, the consensus is a buy, so a passing score is given.

5. Earnings Surprises

Earnings surprises get a passing score if the EPS surprises during the past four quarters have all been positive. This is not the case thanks to one earnings miss in the past four quarters, so a failing score is given.

6. Forecasted growth

Earnings forecast gets a passing score if the consensus EPS forecast numbers increase year over year. The consensus EPS for 2020 is -73 cents and for 2021 is -61 cents, so NIO stock gets a passing score.

7. Growth in earnings

Earnings growth gets a passing score if the long-term five-year number is greater than 8%. Not applicable as Nio stock went public in 2018, and there is not enough financial data. Neither pass nor fail score.

8. The PEG Ratio

The PEG Ratio gets a passing score if its value is less than 1. This is the only score related to valuation, as a PEG Ratio score of less than 1 suggests a potentially undervalued stock. For NIO stock, due to the fact the company is unprofitable, there is not a defined PEG ratio, so there is a failing score.

9. Earnings of the Industry

Industry Earnings get a passing score if the company’s P/E is higher than the industry’s earnings. According to the CSIMarket financial analysis the Auto & Truck Manufacturers Industry has a current trailing-12-month P/E ratio of 37.78 for the third quarter of 2020. Nio is unprofitable so it gets a failing score.

10. Days to Cover

Days to Cover get a passing score if the number of days is less than 2 days. But what are Days to Cover? Days to cover is the number of days, based on the average trading volume of the stock, that it would take all short sellers to cover their short positions. This is a score that has to do with other than fundamental analysis. But on the other hand, it can be an important factor that can move stock prices significantly. The most recent data on MarketBeat shows that the days to cover figure for NIO stock is under 1, so it gets a passing score.

11. Insider Trading

Insider Trading gets a passing score if the net activity for the past three months has been positive. The data on Nasdaq is currently not available so the stock gets neither a passing nor failing score.

12. The Weighted Alpha

The Weighted Alpha gets a passing score if the number is positive. In simple words, the Weighted Alpha is a measure of one-year growth with an emphasis on the most recent price activity. A positive Weighted Alpha indicates the stock price is moving higher. For NIO stock the 1-year growth of over +2,000% gives it a passing score.

NIO Stock Final Score based on Nasdaq Dozen Method

For growth in earnings and insider activity, NIO stock gets neither a passing nor failing score due to insufficient data. So out of a maximum of 10 out of 12 points, NIO stock gets exactly five points. This is not too inspiring.

Taking into account the profitability, which is negative, the negative free cash flows, and the very large increase of debt in 2019, NIO stock is a very speculative bet for 2020 and beyond. And with all fundamental factors suggesting it is extremely overvalued, a lot of caution is suggested.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/11/nio-stock-has-skyrocketed-in-2020-but-high-risks-remain/.

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