They say seeing is believing, but it’s not always that black and white. What if more grey-like features have entered the picture? When it comes to lectric vehicle outfit Nio (NYSE:NIO), and being a bull in NIO stock today, building a good defense first and then hoping history might rhyme, makes a great deal of sense.
Let me explain.
Still, it’s been a rather ignominious year for NIO stock investors overstaying last year’s incredibly generous good tidings. Today and for the year, shares are off 32%.
NIO Stock and the Market
What’s more, the Shanghai-based luxury EV manufacturer has surrendered just over 50% of 2020’s spectacular 1,200% NIO stock rally tied to its March Covid-19 bottom.
So, what gives? It’s not a secret Wall Street’s appetite for higher multiple growth stories – even the strongest situations like NIO – have come under pressure amid rising interest rates and rotation into value-oriented investments. EV giant Tesla’s (NASDAQ:TSLA) near 20% decline this year and contrasting bids of around 35% to 40% in old school auto stocks Ford (NYSE:F) and General Motors (NYSE:GM) are evidence of today’s juxtaposed environment.
Not that that’s all that has NIO investors backtracking.
A chip shortage is also weighing on Nio’s business and share price. Late April’s mixed quarterly results offered a glimpse of those challenges as management forecasted very modest quarter-over-quarter deliveries growth due to a gridlocked supply chain impacted by the scarcity of semiconductors.
Down, Not Out
The good news is NIO stock remains well-positioned to successfully get past today’s proverbial bump(s) in the road. While NIO’s blemishes garnered the most attention during its recent Q1 report, year-over-year expected deliveries supports a more bullish narrative with second quarter revenues forecasted to climb 119% to 129%.
As well and not to be overlooked, Nio has become increasingly efficient. Gross margins of 19.5% easily topped street views and handily reversed negative margins from a year ago. Moreover, Nio has exciting products and execution to thank. It’s latest EC6 SUV has been wildly successful since rolling out last September. And Nio’s anticipated ET7 sedan is still scheduled to launch in 2022.
Lastly, despite today’s business challenges or worries of competition within the EV space, Nio remains a force in the Chinese market. Also, t’s continuing to execute on its global expansion goals. On that front, Nio is readying to grow its existing European operational presence as it moves its first sales and service network into Norway’s popular EV market.
NIO Stock Price Chart
Source: Charts by TradingView
Corrections happen all the time. This year’s price action is confirming that reality as NIO’s bearish cycle spans the entirety of 2021. It’s also slashed the stock’s valuation in half. On a more positive note, shares of Nio stock are in position to form a meaningful intermediate to longer-term bottom. For that readers can turn their attention to NIO stock’s illustrated weekly chart.
Since hitting a correction low in the first week of March off NIO stock’s 50% Covid-19 Fibonacci level and faltering out of a triangle consolidation, shares have retreated for a second time to form a double-bottom pattern. If last week’s hammer-like candlestick is confirmed through $36.79 and accompanied by a bullish stochastics crossover, bullish investors will have a nice spot to pick up shares at a well-supported discount.
Risk and Reward
Relative to pattern downside risk, a rally into the right side of the corrective base and eventually, a base breakout to new highs offers an attractive risk-to-reward proposition. It might not meet the same standards as 2020’s ride, but it’s certainly worthy of buying into. I’d complete any such buy decision with a one-to-three-month hedged collar strategy to begin a longer-term long campaign in NIO stock.
Bottom line, a bit of patience in NIO should go a long way toward a more successful stock purchase. The other factor supporting this plan of attack, in our eyes and on this price chart at least, there is definitely some grey matter or more bearish features to still work through.
And respectfully, there’s no reason to be a crash test dummy if a bearish head and shoulders pattern lurking in the background comes home to rouse.
On the date of publication, Chris Tyler holds (either directly or indirectly) long positions in Ford (F,), Advanced Micro Devices (AMD) and their derivatives. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.