At its peak euphoria, electric vehicle manufacturer Nio (NYSE:NIO) was tempting a run to $70 territory, possibly breaking into triple digits. Unfortunately, a number of factors, with the global semiconductor supply chain disruption being the biggest, contributed to a steep correction of NIO stock. Nevertheless, with the company being one of China’s most relevant innovators, another temptation has arisen.
This time, investors are wondering if now represents an ideal entry point. This sentiment is particularly strong for those who may have ruefully missed out on the rally — or sold their holdings prematurely.
Having gained over 1,012% over the trailing year, discounts have been few and far between. With NIO stock down substantially from the Feb. 9 session (at time of writing, minus 39%), the EV firm offers a compelling contrarian case.
Further, there’s an argument to be made that the global chip shortage — no matter how painful it is right now — will eventually fade. Here, the novel coronavirus pandemic may offer a parallel. At the beginning of the crisis, it was natural for people to have doom-and-gloom thoughts. Later, as the healthcare industry adjusted to the crisis, the threat became less pronounced. Today, we’re seeing light at the end of the tunnel.
In addition, NIO stock is backed by innovations other than the underlying EVs. As our own Robert Lakin pointed out, Nio’s Battery as a Service model may be a gamechanger. He noted that this was the key reason why Goldman Sachs upgraded NIO to “hold” from “sell,” providing a 12-month price target of $59 a pop.
Moreover, Lakin wrote:
“Most households in China lack conditions to install private chargers, especially outside of main cities, Goldman analysts said in December. “In addition, (battery-as-a-service) also represents a systematic solution to the long-existing challenges for EV penetration, including battery degradation, battery upgradability, and lower resale value,” they said.”
Although it’s a pioneering concept, it might not be enough to move the needle for the EV maker just yet.
A Litany of Problems Affect NIO Stock
While we may have avoided utter doom regarding the coronavirus, we’re still not completely out of the woods. No one knows for sure what will come out of this crisis, which leads me to the semiconductor issue regarding NIO stock. Based on historical trends, we’re assuming that everything will be A-OK eventually. But again, who knows?
That’s one of the warnings that Morris A. Cohen of the Wharton School delivered to the rest of us. Modern semiconductor applications are incredibly complex, with multiple dependencies built into a product. In other words, the production process can’t function when only part of a product or system has the required supply of chips.
More alarmingly for NIO stock, Cohen states that vehicle systems that use semiconductors are both convoluted and non-interoperable. Therefore, you can’t just take chips designed for one car brand and apply them to another. This will greatly impact the ability for the automotive industry to recover.
If that wasn’t bad enough, Cohen argues that structurally, the supply chain may never be the same. In the old economic paradigm, the U.S. model was, to put it bluntly and impolitely, to exploit cheap Chinese labor. Now, China wants its citizens to have a taste of the good life. That means the country is no longer a hub for semiconductor production for everyone else but represents a supply source to feed domestic demand.
Theoretically, that angle might benefit NIO stock relative to American EV manufacturers. But then again, Nio has made no secret about its international ambitions. If Nio ever does come to the U.S., it will need to figure out the ultimate perplexing problem: how to make EVs compete with economy model combustion cars?
As intriguing as its BaaS model is, it’s not going to solve the affordability problem affecting NIO stock and other EV companies.
A Peculiar Technical Setup
One thing that gives me pause about NIO stock is the appearance of a pennant formation that began in early March of this year. If the pennant appeared as a consolidation following a sharp spike rally, most technical analysts would likely regard this as a continuation pattern; in other words, more bullishness ahead.
However, the pennant is materializing following a steep corrective phase. Typically, the interpretation is bearish. But you just don’t know for sure since we’re in an emotionally charged market environment.
My gut feeling is that we’re going to see further downside from here. Of course, this is just my opinion based on the outside fundamentals. Anything can happen and you should be prepared for all possible outcomes.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management and healthcare.