I’ve got to hand it to my friends on the InvestorPlace team. The vast majority of them were pounding the table in favor of Nio (NYSE:NIO) back when Nio stock was $2.50 or $3 a share. And now, look at how far the stock has come.
Of course, stocks don’t just go up in a straight vertical line. Even the super-bulls had to have known that Nio stock would eventually retrace. After all, when a stock goes up hundreds of percentage points, it only takes a flimsy excuse for the market to drop the share price.
In the case of Nio stock, the flimsy excuse to sell the shares came in mid-December. Hopefully, you took the InvestorPlace writers’ ideas to heart and bought Nio shares months ago.
But even if you didn’t do that, it’s perfectly fine. With the retracement in play, you now have another chance to purchase the shares before Nio stock flies higher.
A Closer Look at Nio Stock
Suffice it to say that 2020 has been a year of triumph for Nio stock holders. However, the year didn’t exactly start off on an auspicious note.
During the first quarter of 2020, it felt as if Nio stock would be a penny stock forever. (A penny stock is defined by the U.S. Securities and Exchange Commission as a stock trading for less than $5.)
Today, the picture looks quite different. As the investing community got hyped up about electric vehicles this year, the Nio share price stair-stepped its way up to $14 in July, then $28 in October.
Yet, the best was yet to come as the Nio stock bulls managed to thrust the share price up to $57.20 in November. That turned out to be the 52-week high, and perhaps it was too steep of an ascent.
Hence, an overdue correction took place in Nio stock. As of Dec. 18, the share price closed at $46.72. So, what prompted the sell-off, and is it a permanent problem?
The Big Sale
It’s fair to say that Nio stock, and electric vehicle stocks generally, simply went too far and a cooling-off period was due.
However, there was an added catalyst in the case of Nio stock. To be more specific, the company sold 68 million American depositary receipts in a secondary offering.
Typically, these types of share offerings aren’t available to amateur retail traders. Rather, they’re usually bought up by big-money investors. It’s not unusual for companies to sell large blocks of shares at a discount in this manner.
For this secondary offering, the Nio American depositary receipts were sold at $39 apiece. The common stock share price was higher than that, so the market may have reacted negatively to the discount-priced sale.
Not Everyone Is Bearish
Some commentators might even criticize the sale as a “money grab.” Yet, it cannot be denied that Nio could potentially use the capital raised by the sale to expand its operations or possibly even introduce new vehicle models.
And indeed, Nio is expected to announce a new vehicle model during an analyst event scheduled for Jan. 9. The company might even introduce new Lidar (laser-based radar) automotive technologies to the public.
Actually, that might just be the beginning. As I learned InvestorPlace contributor Will Ashworth, Nio could have as many as five vehicles to sell by late 2021 or early 2022.
Besides, not everyone is deterred by the depositary receipt sale. Two-thirds of analysts covering Nio stock rate it a “buy.” Among them is Deutsche Bank analyst Edison Yu, who assigned a $50 price target on the stock, even after factoring in the secondary sale.
The Bottom Line
InvestorPlace contributor Ian Cooper asserted that the pullback in Nio stock is only temporary. I tend to agree with him on that.
Don’t be misled into assuming that Nio’s secondary offering was just a “money grab.” The funds can be put to good use, potentially enabling the electric vehicle maker to forge ahead with new technologies.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
