For a while last year it was fun to trade Tesla (NASDAQ:TSLA) stock indirectly using Nio (NYSE:NIO). They often moved in lock-step which made it a cheap way of trading Tesla. Nio is a rising star in the fleet of electric vehicle (EV) manufacturers who are trying to topple internal combustion engines (ICE), the transportation method of choice since the commercialization of cars. Though we’ve had EVs since the 1880’s, they failed to gain popularity until now. Tesla’s mind-boggling ramp on Wall Street is proof that EVs are here to stay.
Nio stock being up 1,078% in a year is testament that this EV is a legitimate contender to own.
This is not an overnight success and it will take decades to unfold. There is a lot of runway for the supplier of e-cars and trucks to produce many winners. Hundreds will fail but Nio will make it. And therein lies today’s conclusion, which is to own it for the long term.
Tesla is out of the woods for good and well on its way to becoming a giant. Nio is not far behind, especially since they could be getting the helping hands of their government.
Part of my thesis is to avoid the pre-revenue entrants into the EV space. Much of the supply will likely come from the current giant auto manufacturers, Tesla and Nio. If the 80 million machines the world produces are going to become electric, it’s the legacy ICE suppliers that are switching types.
The likes of General Motors (NYSE:GM), Toyota (NYSE:TM) and Volkswagen (XETRA:VOW.DE) will flip their production efforts to whatever the market demands. Most of the new-comers will fail or remain niche companies. Tesla has Elon Musk, Nio has the Chinese resources and they both have strong momentum already. Most of the rest are missing these key ingredients.
Nio Stock Is a Viable Vehicle to Bet on EV Revolution
Fundamentally Nio stock is not cheap. They earn a lot but they pretty much blow it all away. This alone is not a reason to cut the stock loose because growth companies should not be profitable. Imagine if Amazon (NASDAQ:AMZN) pinched pennies, say, six years ago. We would not have had “the cloud” come to life. Doing great things requires spending a lot.
Investors in Nio will need a strong stomach. The critics will be loud and I was one not too long ago. I stopped fighting the tide a while back unless trading specific short-term chart patterns. The thesis behind the concept of electric cars is just too broad to kill this early. It’s got momentum and that will play into the hands of NIO investors.
Starting new positions into speculative stocks is scary on any given day. Doing so while markets are at all-time highs makes that task even scarier. If a new investor needs to own it today I’d make that a starter position. Taking a full bite the first time is reckless. Taking ownership in tranches leaves room to manage the risk during bad stints. There will be dips and those would be better opportunities to buy Nio stock.
For example, there is proven support anywhere above $42 per share. If for whatever reason the stock falls close to that I’d pounce. Closer to the current price Nio also has supports at $55 and $51 per share. These will come into play for faster traders. Momentum investors would probably want to chase the breakout above $60 per share. If that happens it could develop enough tailwind to set new highs again.
I favor using options especially when investors are eager to own the shares. Instead of buying Nio stock outright, I’d sell puts. This would get me long today and leave a huge room for error.
For example, instead of risking $5,800 to own 100 shares now, I sell the Nio August $39 put. For this almost $600 goes into my account today because I commit to buying Nio stock at $39 between now and mid-August. This is a win/win situation because if Nio falls below my strike I get to buy it for 32% cheaper than it is now. If the price doesn’t fall then I would have generated the equivalent of a 10% rally from now.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
