As The Hype Starts to Fade, Steer Clear of Nio Stock

With shares slipping since its announced stock offering, what’s next for Nio (NYSE:NIO)? Nio stock went from zero to hero in 2020. The Chinese electric vehicle (EV) maker was running on empty earlier this year. When the novel coronavirus brought China to a halt, the company looked fast headed to ruin.

Nio stock
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But, thanks to a cash infusion from a Chinese municipality, coupled with a rapid recovery in Chinese EV demand, and Nio’s been one of the top performing stocks of 2020. Shares have soared 982% so far this year. Surging delivery numbers have played a role in this stock’s blockbuster performance. Yet, you can’t deny the impact of the “EV Bubble.”

That is to say, chalk up the lion’s share of its gains to speculation, not improvements in its fundamentals. Sure, with the pivot to EVs accelerating (especially in China), the enthusiasm for this stock is somewhat justified. But, not to the extent we see now. At today’s prices, Nio trades for 26.3x estimated 2020 sales.

Even when factoring in its anticipated sales growth (more than 100% between 2020 and 2021), this valuation may not be sustainable. Add in multiple factors in play (or potentially in play) that could negatively affect the stock in 2021.

Put it all together, and it’s clear risk/return is not in your favor at today’s prices.

Nio Stock Performance in 2020: Changing Fundamentals, or Investor Irrationality?

Long-time bears of this company (including myself) have had to eat humble pie in 2020. Just like with Tesla (NASDAQ:TSLA), this has been a situation where the skeptics have been consistently proven wrong. Yet, is this a situation where bears have been proven wrong due to better-than-expected results? Or, is it a case of markets being irrational longer than short-sellers can remain solvent?

While I lean towards the latter take, I concede it’s a bit of column A, a bit of column B. With regards to a changing fundamentals, the company has pulled off a 180. Rebounding from the brink, with consistant 100%+ delivery growth in the past few months, it’s been more than the “EV Bubble” that’s sent this China EV play higher this year.

But, it’s clear the mantra of “growth at any price” has also helped to sustain its strong performance. As the narrative behind this “story stock” holds, investors could continue to “buy on the rumor, buy more on the news.”

Yet, what if its not all “blue sky coming” (per the translation of its Chinese name) for Nio stock? With many negative factors at play, or on the horizon, shares could be set to give up a good chunk of their gains in the coming year.

3 Factors That Could Push Shares Lower in 2021

There’s plenty at play to justify additional moves higher for Nio stock. With Wedbush’s Dan Ives expecting “eye-popping” Chinese EV demand over the next two years, the company could not only meet, but beat, current growth expectations.

Yet, it’s not all a slam dunk from here. Why? Firstly, while demand in China is heating up, but so is the competition. Sure, investors are well aware of Nio’s rivals. These include Tesla (NASDAQ:TSLA), but also home-grown EV peers like Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI).

But, as short seller Citron Research detailed in a November “short report” on Nio stock, aggressive pricing by Tesla of its Model Y in China could hurt this company’s sales growth. If deliveries and sales fail to double next year, it’s hard to see investors continuing to price shares at today’s valuation.

Secondly, while many have coined this company the “Tesla of China,” long-term it may fail to live up to this moniker. Why? As this Seeking Alpha contributor opined in a recent article, Nio’s dependency on state-owned auto maker JAC Motors for manufacturing may limit its ability to innovate. Sure, that doesn’t limit its ability to scale into a profitable enterprise. But, it could signal this company’s potential runway isn’t as long as current valuation suggests.

Thirdly, with the “EV Bubble” losing steam, investor enthusiasm may be tapped out. Add in the fact short-interest has fallen considerably in 2020 (another point made by Citron), and investors can’t even count on a short squeeze to help fuel further moves higher.

Put it all together, and it’s easy to see shares heading lower over the next twelve months.

Risk/Return Not Much in Your Favor, So Stay Away for Now

Sure, the “blue sky coming” narrative still holds for Nio. But, with its prospects more than priced-in, and factors in motion (or around the corner) that could reverse some of its 2020 gains, buying shares at today’s prices (even after the recent dip) may not worth the risk.

Give it another look if EV stocks make a big correction in 2021. Yet, for now, stay away from Nio stock.

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.

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