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This Collaboration With Nvidia Gives Nio Stock Legs, but Tread Lightly

Nio (NYSE:NIO) has been one of the most impressive names in the market. Even though shares bottomed in October 2019 rather than in March 2020, Nio stock has been on an unstoppable run. 

NIO Stock

Source: Carrie Fereday /

Seriously, anyone who bought this stock with strong conviction has experienced a potentially life-changing gain in less than 18 months. 

In just 67 weeks, Nio stock went from a low of $1.19 to a high of $66.99. The latter was achieved on Jan. 11, which was the Monday following the company’s Nio Day and the news it would work with Nvidia (NASDAQ:NVDA). 

In any regard, the 5,530% rally in about 16 months has been a real game-changer for investors. 

Nio, Nvidia and Beyond

The company held its Nio Day event Jan. 9. Aside from announcing a new sedan — the ET7 — that will compete with peers like Tesla (NASDAQ:TSLA), Nio also announced it will use Nvidia’s DRIVE Orin system-on-a-chip.

The chip will be used for Nio’s next-gen electric and autonomous vehicles. I have had the privilege of meeting with Nvidia’s automotive team at auto shows and its GTC events. If investors do not consider this company as the  one of the leaders in autonomous driving technology, they are severely underestimating Nvidia’s capability. 

Incorporating Nvidia could be a big win for Nio, particularly as we continue to advance into the autonomous driving space. These are the types of moves the automaker will need to make in order to justify its lofty stock run.

Wedbush analyst Dan Ives described the ET7 as about the size of Tesla’s Model S, targeting the Sedan market in China. He thought, once released next year, the ET7 would boost Nio’s total addressable market over the next five years.

The company, he said, describes the ET7 as a “cozy living room,” with features including massage seats. Add to that the autonomous-driving capabilities and the analogy seems to hold.

Trading Nio Stock

Daily chart of Nio stock

Source: Chart courtesy of TrendSpider

Readers of InvestorPlace’s Top Stock Trades column may recall the chart for Nio stock. That breakout area near $48 was clear as day and it’s exactly what we were looking for at the end of December. 

Shares have traded quite well since then, easily clearing $48 and soaring into the mid-$60s. The news over the weekend helped launch this stock to new highs. 

However, the rally was threatened by the company’s decision to raise capital. For now though, Nio stock continues to hold up well. On a dip, see if the stock fills that gap towards $59. Below that and the prior high at $57.20 could be in play, followed by the second gap at $54.60 and the 10-day moving average. 

Above the current high puts the 161.8% extension in play near $69.  

Bottom Line on Nio

The company is not raising capital via a share offering. Instead, it’s raising $1.3 billion in convertible notes, due in 2026 and 2027. I read some negative commentary on this, but I think it’s a great idea — even if the stock price ultimately wavers because of it.

Nio’s previous actions to bolster its balance sheet is exactly why the stock erupted higher. Creating automobiles and building factories is not cheap work. There’s a reason automakers have such a difficult time remaining consistently profitable. Why not strike while the iron is hot? 

With that said, the bull case — for me — sits with Nio continuing to deliver on its production results and the technicals on the chart. Because really, the valuation is simply not justified up here. Same goes for Tesla. 

Sporting a market cap close to $100 billion and estimates for $5 billion in revenue next year leaves Nio stock trading at roughly 20 times forward sales. For an unprofitable automaker that is crazy. 

In other words, I will gladly bob-and-weave in and out of Nio stock but I will not be left holding the bag when this bull trend finally ends. That may rub some people the wrong way because there are a lot of bulls in this name that have made a lot of money, but at the end of the day, the valuation simply doesn’t make sense. 

That’s even if Nio has 120% revenue growth this year and 100% growth in 2021. 

On the date of publication, Bret Kenwell held a long position in NVDA.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.

Article printed from InvestorPlace Media,

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