Before we go forward, let’s go backward. In May, Nio (NYSE:NIO) stock was being pressured lower, as growth stocks were enveloped in a painful bear market. Nio suffered a peak-to-trough decline of 54% as the stock barely undercut the low from March.
For comparison purposes, Nio didn’t hold up quite as well as Tesla (NASDAQ:TSLA). The latter suffered a high-to-low loss of roughly 40% and didn’t undercut its March low in May. Both stocks — given that they are EV stocks and growth stocks — underperformed traditional automakers like Ford (NYSE:F) and General Motors (NYSE:GM).
Luckily, EV and growth stocks have been on the mend, which has given patient bulls an opportunity in this group. Let’s look at the technicals for Nio stock, then the fundamentals.
Trading Nio Stock
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I won’t lie. The main reason I like Nio here is because of the technicals. While one could argue that Tesla is a technology, energy and automaker conglomerate, less can be said of Nio.
While Nio does have a large market to sell to — China — so does Tesla. And Nio lacks the energy component that Tesla has. In any regard, my point is more that the technicals are more attractive to me than the fundamentals. Personally, I find it hard to justify Nio’s valuation.
But the technicals are much more friendly to the bull case.
Earlier I talked about the May low undercutting the March low, the latter of which came into play at $31.91. Notice how Nio stock barely undercut this mark. That’s known as a “look below and fail.”
As in, the stock “looked below” a key level and “failed” to sustain below it. That’s good, and it led to a massive reversal. Nio stock reclaimed all of its key moving averages in rapid fashion, as the dip-buyers stepped in strong.
It rallied all the way up to that key $54 area and the 61.8% retracement. About a week ago, we flagged that level and said, “If it can continue higher, keep in mind that the 61.8% retracement comes into play near $53.” At the time, shares were just below $50.
That level combined with the marketwide sell-off on July 8 is creating an opportunity in Nio stock. Already down four days in a row prior to that session, it sets up a nice test of the 50-day and 200-day moving averages.
For those that missed their chance at Nio, this is a great opportunity.
Breaking Down Nio
With its $75 billion market capitalization, I don’t necessarily consider Nio stock a bargain. Shares trade at almost 10x next year’s earnings and the company is not yet profitable.
For years, I felt that the auto stocks were undervalued. Ford, General Motors, etc. — many of these names paid a great dividend and made good money. Even if auto sales were stagnant, they were still at or near record highs and these companies were profit machines.
I was wrong about them being undervalued, as the stocks treaded water for years. In that vein, I will probably be wrong about the newfound love for EV stocks. Tesla probably can’t justify an $800 billion to $1 trillion market cap based on its current business, but that didn’t stop the stock from exploding higher.
The same goes for Nio. That’s why I will lean more heavily on the charts than on the fundamentals in this case. Based on fundamentals, investors would have shorted both Tesla and Nio a long time ago (and many did), while that trade blew up in the shorts’ face. That said, Nio does have momentum in its business.
Analysts expect revenue to more than double this year, growing 110% to $5.35 billion. In 2022, estimates call for growth of roughly 65% to $8.8 billion. You can see how a few more years of growth will have this company generating some serious revenue power. That revenue power is leading to the company’s growing network, with plans to have 4,000 battery swap stations by 2025.
Earlier this month, Nio reported that June deliveries climbed more than 20% month over month and more than doubled year over year, up 116%. Clearly Nio has momentum, both from a deliveries standpoint and revenue standpoint. As for Nio stock, it too is trying to regain momentum. Let’s look to buy the dip here.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.
