Government regulations, a controversial crash and other drags sent Nio (NYSE:NIO) shares on a detour south. But looking down the road, does today’s discounted price in NIO stock offer investors an attractive purchase?
Let’s examine the evidence both off and on the price chart, then offer a risk-adjusted determination aligned with those findings.
It’s been anything but an enjoyable ride in Chinese electric vehicle (EV) upstart Nio in recent weeks.
Since early July, shares of NIO stock have skidded lower by roughly 30%. And unlike the Nasdaq or S&P 500, it’s not as though it was parked at all-time-highs and priced for profit-taking. Pressure on Nio shares came just as the EV luxury upstart was finally turning the corner on a painful correction.
At its worst, the bearish cycle resulted in shares losing more than 50% over the spring from NIO stock’s January all-time high. So, what’s gone wrong for one of 2020’s strongest stock plays?
A Cooling EV Market and Government Regulations
Actually, there’s been no shortage of threats this year that have been responsible for NIO stock’s relative and absolute price weakness.
For one, there’s the inevitable unwinding of unsustainable price momentum. NIO shares did gain more than 3,200% this past year on the back of an overheated EV market, which jettisoned shares out of their Covid-19 bear market low.
This year’s broad-based rotation out of higher-multiple growth stocks has been another obvious headwind. Even Tesla (NASDAQ:TSLA), the world’s largest EV outfit, struggled in 2021 as investors collectively swapped into cyclical and value stocks at the expense of growth.
That’s not all that’s had Nio investors beside themselves. De-listing threats of Chinese securities by U.S. regulators has been another drag on shares.
Another related factor is the Chinese government. Its persistent actions against big tech companies such as DiDi Global (NYSE:DIDI) and Alibaba (NYSE:BABA) over national security concerns have challenged the shares despite no wrongdoing on the part of Nio.
That’s not to say NIO stock is free and clear of guilt. The specter of wrongdoing is facing Nio following a fatal crash with the company’s self-driving system engaged.
Making matters worse, an investigation into the fatality has also resulted in a probe to see if Nio tampered with evidence. The company is alleged to have deleted or modified the wrecked vehicle’s data.
NIO Stock Weekly Price Chart
Source: Charts by TradingView
It may seem NIO stock has an insurmountable number of obstacles in its path. As expressed though, investors have dutifully priced in those concerns this year. And today, there are improving signs that the bearish cycle is nearing its end.
Technically, and as the provided weekly chart reveals, shares of NIO stock have pulled back into a mostly lateral test of the May and June 76% retracement level over the past month.
If successful, the challenge will put together a higher-low pattern within Nio’s larger corrective cycle of the past eight months. And if we’re anticipating a breakout in the months ahead, today’s technical risk pales next to the upside potential.
Coupled with an equally supportive stochastics setup and Nio’s mostly-ignored growth prospects, a long entry appears enticing.
For investors open to buying NIO stock but wanting to remove the always-real possibility of larger downside risk — or tactically accumulate shares on weakness — an October $35/$45 collar is a favored starting position.
On the date of publication, Chris Tyler 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.
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.
