It’s not surprising that China-based electric-vehicle maker Nio (NYSE:NIO) has been one of the stock market’s strongest performers in the past year. Investors have been more than willing to bid up Nio stock.
The shares have soared not only due to the company’s impressive growth numbers, but also because of the perception that Nio will become a powerhouse on par with Tesla (NASDAQ:TSLA).
But Tesla stock itself is showing signs of peaking. Given Nio’s high correlation with Tesla, that’s cause for concern for the owners of Nio stock. And there are other factors on the table that are negatively affecting the shares.
Admittedly, I’ve called for the bubble propelling this stock to pop many times in recent months. But Nio and its rivals continue to make new highs. The EV bubble, however, is far from being a good reason to be bullish on the shares.
It’s impossible to call a top to this bubble. And predicting how long a bubble can last is a fool’s errand as well. So investors who own Nio stock should sell it into strength.
Overvalued Nio Stock Can Still Head Higher
Before laying out the bear case on Nio, I’ll concede that this richly-priced EV stock still has some room to climb further.
For starters, high growth remains on the menu. That may help sustain the current optimism towards the stock. In other words, with Nio continuing to report delivery numbers showing triple-digit-percentage growth, investors have a good reason to “buy on the rumor, and buy more on the news.”
In addition, the high growth of the Chinese EV market, which is expected to continue, may help bolster Nio stock as well. It’s anticipated that Chinese EV sales will soar from around 1 million in 2020 to as much as 6 million by 2025. Consequently, Nio may live up to its current sky-high expectations.
On top of that, as Bernstein sell-side analyst Mark Newman told Barron’s on Jan 25, the price action of Nio and other EV stocks has become “self-reinforcing with Tesla.” In short, as long as Tesla trends higher, Nio stock will continue to climb as well, he believes.
But Nio Has Plenty of Negative Catalysts
But what happens if Tesla starts retreating? With Tesla now looking to be peaking, a big selloff of its shares could be just around the corner. Coupled with company-specific risks, that may send Nio stock lower over the next 12 months.
However, the end of Tesla’s stunning run may impact the future price action of Nio stock. Meanwhile, factors pertaining specifically to Nio could also negatively affect the shares in the coming months.
For one, if the thesis behind Citi’s recent downgrade of Nio plays out, the automaker’s 2021 and 2022 shipments may end up lower than expected. It’s going to be hard for Nio to sustain its current $91 billion market capitalization if its current rate of growth (over 100%) shows signs of rapidly slowing down.
Also, as another InvestorPlace contributor, Dana Blakenhorn, detailed in his recent bearish take on the stock, investors need a reality check when it comes to Nio. The company may be growing. But it’s far from being the automotive powerhouse that its current valuation implies. When (not if) investors realize that it makes no sense to give Nio a valuation above that of General Motors (NYSE:GM), the stock will have significant room to fall.
Take The Money and Run (While You Still Can)
With its nearly $100 billion market capitalization, Nio may look like it’s already an automotive powerhouse. But almost all of its current valuation is due to investors bidding it up in tandem with another over-hyped EV stock, Tesla. Taking a closer look, it’s clear that the company is a long way from dominating the Chinese EV market, let alone from becoming a major player in the global automobile market.
As Tesla shows signs of topping and evidence mounts that its shares have gotten way ahead of themselves, now may be the time to cash out of the shares. Investors who take that advice may leave some gains on the table. But selling the shares now, before the bubble bursts, may be the best move for the owners of 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.