This year has not been kind to Chinese equities. The government there is on a campaign that has decimated the value of quality companies. Year-to-date, Alibaba (NYSE:BABA) stock is down 35% while revenues increase more than 30% per year. It is not alone, the whole cohort is in pain. This includes Nio (NYSE:NIO) stock, which is down 28% this year.
This is where the similarities end for these two. If we considered an extra three months, NIO is still up 100%, when BABA is down 43%. Over the last two years, investors in NIO are up 2,000%, that’s 30% better than Tesla (NASDAQ:TSLA). It is doing well yet there are opportunities for upside here.
Nio and Tesla are both benefiting from the EV campaign to replace the internal combustion engine. Tesla blazed the trail but NIO is in close tow. NIO has the benefit of operating strictly in the largest market for EVs. It also has the early mover advantage, so they currently deliver close to 50,000 vehicles a year.
Nio is growing extremely fast, as is evident from their profit-and-loss statement.
Nio Stock Should Be on Rails
Management quadrupled revenues in the last four years. While they still lose money, for now I give them a pass on that. Young companies need to spend a lot to grow fast. They can hone their profitability later. While the year-to-date stat is pitiful, investors who had conviction in the stock are still smiling ear to ear.
When a stock is performing this well, new traders should be looking for entry points. Those present themselves on dips. NIO stock corrected almost 40% since July. This is a legitimate enough of a discount to warrant investigation. Since Wall Street is on edge, and the indices are at all time highs, caution is necessary. These opportunities to buy stock on dips are not “all in” invitations.
No one should have this much conviction. Smart money should enter full positions in several tranches each. NIO stock near $30 per share is attractive. However, it can get cheaper especially if they lose the May low. If so, that could trigger a bearish pattern to cost it another 20%. There are support zones to help it avoid a complete disaster.
Investors Should Stay Humble
These are unique macroeconomic conditions, so we don’t know what we don’t know. This is especially true in China. While Nio’s business is not yet on the government’s target, we don’t know it won’t be. We mentioned that the EV opportunity is real. I am not one to chase stocks of hopeful pre-production companies. I prefer betting on the current leaders like TSLA and NIO.
We should acknowledge that saturation is also a risk. The world produces 90 million vehicles a year. We can’t replace all of them with EVs because of battery constraints. My thesis is that Tesla and Nio and legacy makers will satiate the demand. Only scraps remain for newcomers.
Technically, NIO stock is falling into support. It has the financial strength to convince people to stick with it. Management creates almost $300 million in cash flow from its own operations. They do have resources to adapt and keep up with the big boys. The company is not profitable yet but statistically it’s cheap.
When a company is growing this fast its price-to-sales (P/S) matters. Nio stock owners are realistic with their expectations there. Its P/S is 13, which is 30% cheaper than Tesla.
I have recently done homework on building vehicles with electric propulsion. I found that the battery was the biggest variable. This makes me appreciate Nio’s approach. They made the battery a short-term consumable. This makes the face value of their vehicles attractive, too. Forward thinking will bring it success.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.