The electric vehicle (EV) trade has been one of the hottest on Wall Street over the past year. Nio (NYSE:NIO), Tesla (NASDAQ:TSLA) and others have fueled a massive rally. For its part, Nio stock is still up nearly 1,200% in the past year.
At some point, these types of moves become unsustainable. I don’t necessarily mean to criticize Tesla, Nio and others . But historically speaking, rallies do have some kind of limitation.
Automotive stocks — like Ford (NYSE:F), General Motors (NYSE:GM) and others — have received absolutely no love from Wall Street over the past decade when it comes to valuations. That makes the sudden, strong desire for EV stocks quite interesting, as those stocks now command a hefty valuation premium.
Look, I love Tesla and its products. I love EVs, too. But it’s pretty hard to justify an $800 billion market capitalization for Tesla. On the other hand, though, at least the company has this sort of take-the-world-by-storm feel to it. It’s working on energy, EVs, semi trucks, autonomous driving — you name it. And of course, it has Elon Musk.
I’m not necessarily ignoring Nio. I think that it has done a lot of great things, too. But to say that its valuation doesn’t reflect its accomplishments is misleading.
Nio Is Great, But…
As a company, Nio has a lot of momentum right now. It recently launched a new vehicle, and it has plans to unveil more EVs in 2021 and in the years to come.
The biggest risk to Nio stock was liquidity. It’s the same risk that we heard from the bear camp about Tesla for years. Once both companies took care of their liquidity worries, their stocks were able to scream higher. Now I can’t explain the phenomenon of EV stocks. However, I don’t really need to.
At the moment, EV stocks command a premium, and I will assume that will remain the case until proven otherwise.
However, the problem with Nio isn’t necessarily its valuation, although it’s far from cheap. The problem is its momentum, which can cut both ways. When momentum is working in the bulls’ favor, it drives traditional investors crazy as stocks surge higher.
Nio stock has soared thousands of percent, but the shares cannot continue to post those kinds of gains. While I have remained bullish on Nio because of the momentum of its business and its stock price, I now have to question whether that momentum is gone.
Trading Nio Stock
Notice how much power and momentum Nio stock had behind it last summer. The shares wouldn’t even approach their 50-day moving averages. That’s how quickly buyers were willing to step in and gobble up the stock.
When the stock finally dipped down to its 50-day on Dec. 29, the shares erupted higher. In fact, Nio posted a monster reversal, reaching new all-time highs.
However, the next time it tested the 50-day moving average, Nio stock barely bounced. It was a sign of waning momentum. So was the fact that the stock couldn’t make new highs, despite its two attempts to climb.
Shortly after that, the shares fell below their 50-day moving average and their 100-day moving average, both of which had been support levels. Since then, the stock has been choppy and trying to find its footing.
From this point, Nio stock can go in one of several directions. Its long-term trend is still in bulls’ favor, for now.
One outcome could be simple consolidation. Like FAANG stocks over the last several quarters, EV stocks could be simply settling into a trading range that lasts for several months or several quarters.
For Nio stock to regain its momentum, it will ultimately need to reclaim its key moving averages and re-establish a new uptrend. Until then, let’s see if the shares can push above $46.30 and stay above that level. Such a move would put Nio stock back above some of its short-term moving averages.
But the stock’s break below $40 has put its March low and its 200-day moving average in play.
The Bottom Line on Nio
Nio’s delivery and production numbers continue to improve. Its 2020 deliveries came in at 43,728 vehicles, up 112% from 2019.
However, when the company last reported its earnings, its top line came in slight below analysts’ average outlook. Further, its management provided guidance for a 15% to 18% increase in Q1 deliveries, versus the previous quarter.
That would be pretty decent growth, but it shows that the company’s momentum is slowing. To be fair, that’s what happens to companies; they can’t grow at a torrid pace forever. While analysts, on average, expect Nio’s revenue to roughly double this year, the mean outlook calls for “just” 62.5% growth in 2022 and a 44% increase in 2023.
Yet the shares trade for roughly 5.5 times analysts’ average 2023 revenue estimate. That’s rich for most stocks and certainly rich for an automaker. That’s not necessarily the nail in the coffin, but it’s something to be aware of when a stock’s momentum is waning.
So here’s the bottom line: With the momentum of Nio stock slowing, before I buy the shares, I either want them to fall further below their 200-day moving average or I want to see them gain positive momentum.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.