New Bear Market Brings Awaited Opportunity for Nio

The trading week ending Dec. 4 was unkind to Nio (NYSE:NIO). Nio stock slumped 20.50% and enters the second week of the final month of 2020 24.76% below its 52-week high. By the strict definitions of technical analysis, declines of 20% or more from recent highs indicate bear markets are afoot.

A Nio (NIO) sign outside of the company's facilities in Shanghai, China.
Source: Andy Feng /

Examining recent headlines, it’s clear Nio’s slack isn’t attributable to fundamental weakness in its electric vehicle (EV) business. In fact, the company delivered nearly 5,300 vehicles last month, a year-over-year gain of 109.3%, and its year-to-date deliveries stand at 36,721, a year-over-year jump of 111.1%.

“NIO is in the process of accelerating the production capacity expansion in December 2020 to accommodate the increasing order growth,” according to the Chinese auto manufacturer.

Those are encouraging data points and the above quote on boosting output capacity is bullish. It says that although China’s EV landscape is increasingly fraught with new players, customers there are responsive to the Nio brand and maybe, just maybe, the Tesla (NASDAQ:TSLA) of China comparisons have some merit.

So What Ails Nio Stock?

Some of the headwinds Nio is encountering come courtesy of U.S. policymakers. And no, it’s not President Trump, who’s often taken a heavy-handed approach to dealing with Beijing. Last week, the U.S. House of Representatives passed the Holding Foreign Companies Accountable Act, which if it becomes law, would allow domestic exchanges to boot foreign companies if they don’t commit to audits similar to what U.S. companies go through.

This is potentially problematic for Nio for more than one reason. First, the House is controlled by Democrats, though that majority will be reduced when the new Congress is sworn in. Second, the legislation enjoys bipartisan support in the Senate – it was authored by a Democrat and a Republican. Third, consensus wisdom prior to Election Day was that now President-Elect Biden would take a softer approach to dealing with China than Trump.

At its core, the bill is more about preventing the next Luckin Coffee (OTCMKTS:LKNCY) or Kandi Technologies (NASDAQ:KNDI) type scenarios from coming to pass. Some index providers aren’t waiting around, recently announcing plans to boot several Chinese companies from their benchmarks.

If I had to bet, I’d say the legislation isn’t aimed at targeting companies like Nio. With a market value of $61.77 billion, Nio should know much of its bread is being buttered by U.S. investors and there’s no reason to jeopardize losing a prestigious listing on the New York Stock Exchange.

Market is Linking the Stocks

The other problem confounding Nio stock in recent weeks is that it moves along with its China EV peers, such as Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI).

It’s just one day, but confirmation of this trend arrived on Dec. 1 when Hindenburg Research issued a bearish report on Kandi. This sent Nio and XPEV stock lower despite the fact that Goldman Sachs upgraded Nio on the same day.

For now, the three Chinese EV makers are being lumped together. But these aren’t apples-to-apples comparisons because Nio is larger than Li and Xpeng combined. These correlations should ebb as investors get back to basics, realizing Nio is likely the preferred Chinese EV play.

Nio Still Offers Upside

Capitol Hill goings on are beyond Nio’s control. But there’s little to suggest Congress is overtly targeting the company or that it’s another Lukcin Coffee. It’s not.

With some analysts bullish on the EV producer’s delivery trends for the next three years, the aforementioned near-term headwinds could give way to market share gains and more upside for Nio stock.

“Through its focus on user experience enhancement [autonomous driving, battery swap, and Battery-as-a-Service (BaaS) model], it will gain share faster,” notes Bank of America analyst Ming Hsun Lee. Lee adds there’s “potential overseas contribution starting from 2022.”

The BaaS model plus advances in cell-to-pack/blade large cell technologies could propel Nio to the high $50s or low $60s. This will represent significant upside from the Dec. 4 close at $43.04.

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

Todd Shriber has been an InvestorPlace contributor since 2014.

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