The EV trade has certainly faded from the heights it enjoyed in the second half of 2020 and the early parts of 2021. While Nio (NYSE:NIO) remains one of the higher quality plays in the group, NIO stock has certainly given bulls cause for concern.
Tesla (NASDAQ:TSLA) reported earnings a few weeks ago and while it took a few days for it to rally, it eventually crept its way higher. Perhaps that’s what’s happening with Nio, although so far, the bulls can’t seem to muster up any strength.
Unfortunately, Nio’s dip — now down 16% since reporting earnings on Aug. 11 — came at a decisive time. Specifically, the stock was chopping around several key moving averages and now its failure to rally may have serious implications.
The Quarter Wasn’t Enough
A loss of 3 cents per share in the quarter beat consensus expectations by 8 cents. Revenue of $1.31 billion surged 125% from a year ago and eked past analysts’ estimates by $20 million.
The numbers were pretty good, but apparently not good enough.
For next quarter, Nio expects revenue of $1.38 billion to $1.49 billion. The midpoint guide of roughly $1.43 billion is about in line with consensus expectations, at $1.42 billion. As for deliveries, the company expects between 23,000 to 25,000 vehicles, up from a prior guide of 21,000 to 22,000.
I’m not a raging Nio stock bull or a drooling EV enthusiast. But if I had this report ahead of time, I would have thought it would generate a higher reaction, not a lower reaction. That’s especially true with Nio down 20% from the July high and 34% from the all-time high heading into the report.
It’s not like the stock was at the highs when it reported.
High Growth, But Overvalued
That price action is somewhat of a red flag now, isn’t it? By technical definitions, Nio stock is in a bear market. Now we have a pretty good quarter and the stock reacts by tipping lower, now popping higher. We’re talking about a top- and bottom-line beat, solid guidance and strong delivery expectations.
I guess one could argue that Nio could have reported a surprise profit and topped Q3 expectations with its guidance. But still, it raises an eyebrow that investors seem more keen on selling this name than buying it, especially this far off the highs.
On Aug. 2, Nio delivered somewhat disappointing delivery results for July. While it generated strong year-over-year results, deliveries actually slipped 1.8% sequentially. Is the competitive pressure heating up?
I say that because Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) both posted double-digit sequential delivery growth and more units. In other words, Nio is not sporting the deliveries momentum that some of these newer players are. At least in the short term.
Looking out to the full year, analysts expect sales to grow 112% to $5.4 billion this year. Next year, estimates call for 65% growth to $8.9 billion.
For an automaker, that’s impressively strong growth. However, let’s not pretend that the stock is cheap, trading at more than 12x this year’s revenue. Even for next year, Nio stock trades at 7.4x revenue.
I get it: Everyone seemingly wants to revalue the auto sector because they’re now EV players. I don’t know why that matters, really. This sector has seemingly never commanded an in-line market valuation, let alone a premium valuation.
I always thought Ford (NYSE:F) and General Motors (NYSE:GM) traded with too low of a valuation. Maybe that makes it seem like I can’t be satisfied with either outcome, but to me, Nio is overvalued even though it’s come down a lot from its highs.
That said, just because it has a high valuation (in my opinion), doesn’t mean it can’t garner an even higher valuation once the stock is back in favor. The question is, when will that happen?
Nio Stock: 30% Up or 25% Down?
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We could be setting up for a “three strikes and you’re out” scenario with NIO stock.
I say this because despite solid results, investors sold the stock down. Further, they did it at a key point on the chart.
Shares were holding up at the 50-week moving average, but that has since failed. So has the July low at $38.66, which is now acting as resistance. If Nio stock can’t reclaim this mark, it sets it up for a monthly-down rotation and could put the $30 to $31 area in play.
If Nio were to dip that far, we’re talking about a roughly 25% decline.
On the flip side, keep an eye on the 50-day and 200-day moving averages. Moving above those measures and the $46.50 level, could kickstart a move to the upside. In that case, let’s look for $50, then a potential push to the $53 to $54 level. If that plays out, it’s a 30% gain.
I think Nio is a high-quality business and will eventually find its stride. But it’s not clear that that’s the case at this moment and thus, we have to be prepared for both directions.
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.
