Recently, I’ve noticed two things about Nio (NYSE:NIO) and NIO stock.
The first thing is that it appears to be setting up a $ 38-floor price. Please don’t go out and buy some at $38 just because I said so. A 10-year-old could do a better job of technical analysis. Really.
The second thing comes courtesy of InvestorPlace’s Chris MacDonald.
He recently discussed a couple of reasons why Nio stock was moving in reverse. The competition was one. That goes without saying. It was MacDonald’s second point that got me to thinking.
In a nutshell, MacDonald argued that investors appear to be pricing Nio as if it could miss its Q2 2021 production target of 7,500 vehicles per month. His basis for the argument is Nio founder and CEO William Li, who stated as much in comments made in the South China Morning Post.
Rather than look at this as a second-quarter hiccup, aggressive investors ought to view this as a real opportunity.
A $38 Nio Stock
From Nov. 5, 2020, to Mar. 3, 2021, Nio stock has closed every day of trading at $40 or higher. That’s 80 consecutive days or approximately four months. Since Mar. 3, it’s closed below $40 on 13 out of 25 days, a 50% batting average.
If this were baseball, that would be a tremendous accomplishment. However, when it comes to stocks, it’s not so great in a market environment that’s generally bullish.
Clearly, Nio’s stock price is searching for direction. While the founder’s comments might be cause for concern in the near term, he didn’t seem to have a problem with the idea of missing the company’s quarterly production target set out at the end of 2020.
On Mar. 26, Nio issued a press release that stated it would suspend production at the JAC-NIO plant in Hefei, China, for five working days starting Mar. 29. The cause being the semiconductor shortage. As a result, its Q1 2021 deliveries would be 19,500, down from 20,250 at its midpoint estimate for the quarter, a 3.7% decline.
It could make that up in a heartbeat.
Its plans call for 10,000 vehicles to be produced monthly from June through December. At some point in Q1 2022, it will up that production goal to 12,500 per month or an annual run rate of 150,000.
The investors who haven’t bought in are left sitting on the sidelines to determine if this is an industry problem or just a company-specific one. Until this answer is made clear, investors aren’t in a rush to buy.
That creates little support for the stock. So far, it appears investors stepped in on April 8 to buy. By the time this is published, its $38 support could be breached, pushing into the mid- or low-$30s.
The last time I wrote about Nio was mid-March. At the time, I had reservations about stocks in general. I felt like good things would happen for Nio in 2021, but a return to $60 where it traded in February was likely not in the cards in the near term.
That’s precisely what’s played out.
On Mar. 15, the day of my article, it was trading around $45. As I write this, it’s up almost 4% on the day but below $39. A 13% decline is hardly a concern for a growth stock such as Nio. These corrections are bound to happen.
The maximum drawdown from its 2021 high of $66.99 on Jan. 11 to its $31.91 low on March 5 is $35.08 or 52%. If you bought in mid-January, you’re sitting on a big paper loss. Don’t sell.
All the electric vehicle manufacturers are experiencing the same problem. Automotive News reported on April 6 that the Alliance for Auto Innovation, a coalition of automakers with factories in the U.S., asked U.S. lawmakers for help on this front.
“The U.S. Commerce Department should dedicate a portion of funding in a proposed bill to expand U.S. semiconductor production to auto sector needs, the Alliance for Auto Innovation said in written responses to a government-initiated review,” Automotive News reported.
The automakers’ feeling is that a U.S. shortage could have been avoided had a percentage of chips been set aside for future vehicle production. Like many things out of whack during the pandemic, the long-term will likely see production return to normal.
So, if you feel Nio’s got the stuff to compete with its Chinese peers, not to mention global players such as Volkswagen (OTCMKTS:VWAGY), who’ve totally committed to EVs, then you ought to look past the present and focus on the future.
One with 150,000 annual vehicles.
If you are such a person, you might hope it tests $31.91 again. In the meantime, buying some Nio stock at $38 and change and waiting to see what happens is an excellent idea.
As I said in March, I do see $60. Just not likely in 2021.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.