Starting in February, EV plays like Nio (NYSE:NIO) stock started to experience a long-overdue correction. For this China-based electric vehicle (EV) maker, that meant a selloff from over $60 per share, back down to $35 per share.
But, on March 9, investors decided to dive back into EV plays in a big way. Markets overall on that day saw big gains. But, it was popular names in this sector that saw the largest boosts. Nio is continuing to bounce back, and currently trades at $43.94.
Does this mean the sell-off is over? Is this stock set to fully rebound towards its past highs? Only time will tell, but this looks more like a “dead cat bounce” than the start of another upward surge. That is to say, expect this recovery to be short-lived.
Why? EV sales in China are still expanding at a healthy clip. But, it’s starting to look like Nio will fail to live up to prior growth estimates. Since it needs high sales growth to justify its current valuation, underwhelming results could push it down to lower price levels.
Granted, as some have pointed out, the recent disappointment in Nio’s EV sales may be short-lived. There’s also an upcoming catalyst that could bring back interest into the stock as well. Yet, the risk that it could contract further outweighs the chance that it mounts a rapid rebound.
In short, stay away.
NIO Stock and Underwhelming Delivery Results
Admittedly, I take a more bearish than average view on electric vehicle stocks. However, I don’t deny this sector’s big potential in the coming years. Especially in China, where electric vehicle and hybrid electric vehicle sales are set to grow by double-digits this year, and in the years ahead.
This helps to support the case that Nio will live up to analyst expectations for 2021. Sell-side consensus calls for revenues to more than double in 2021, and grow another 64.5% in 2022. But, while year-over-year, the company’s EV delivery numbers still look impressive, sequential month-over-month delivery growth has started to slow down.
The Covid-19 pandemic, and the resultant pent-up demand, was a big factor in Nio’s stunning sales growth starting in mid-2020. This record run coincided with China entering “recovery mode” post-outbreak. What’s the takeaway from this? Underestimating how much of last year’s success was a “one and done” event, analysts may have gone overboard assuming sales could climb by triple-digits again this year.
Before the recent “dead cat bounce,” this was a concern. This is evident from investor reaction to its recent earnings release.
If March delivery numbers (which will come out early next month) fail to impress, further declines could be in the cards for NIO stock.
Deliveries Could Pick Up, But Valuation Remains a Concern
Recent underwhelming delivery numbers may be a sign of lower-than-expected results to come. But, admittedly, it may be short-sided to take recent numbers, and extrapolate this bearish conclusion.
As Wedbush analyst Dan Ives pointed out in a response to investor concerns about flailing China EV sales, it’s important to keep in mind the Lunar New Year when looking at February China EV numbers. In other words, until we see the March numbers, it may be best not to jump to conclusions.
Also, there may be a new catalyst that could further renew investor interest in NIO stock. For example, as InvestorPlace’s David Moadel discussed March 4, the company plans to enter the European market, starting in the second half of 2021. Success in Europe could pave the way for an eventual move into the U.S. market as well.
Yet, while both these factors could send NIO stock on a rapid rebound, given the stock’s rich valuation, paying such a premium for a company whose sales growth is starting to be called into question may not be a worthwhile investment.
Even With Its Recent Bounce, Skip out on Nio
Bulls on the stock (like Dan Ives) may correct that the recent slowdown in China EV sales won’t last long. But, with the future direction of this stock so dependent on how strong its sales are starting this month, buying now, even as it remains around 34% below its all-time highs, may not be the best move.
Sure, it’s still early to say that its recent rebound is merely a “dead cat bounce.” But, weighing the risk of further losses against the possibility of a continued rebound, it’s best to skip out on NIO stock for now.
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, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
