Macroeconomic uncertainties in China are hurting electric vehicle-companies in the region. Case in point, instead of breaking out to new highs on strong sales, Nio (NYSE:NIO) is underperforming. NIO stock peaked in July at $55 but is currently trading around $36.
The 20-day and 50-day simple moving averages for NIO are now technical resistance levels. This suggests that the stock needs a strong positive catalyst to push it above its moving average.
So what’s holding Nio shares back?
China Worries Weigh on NIO Stock
China’s crackdown on e-commerce firms spooked Nio investors. The government introduced punitive regulations protecting consumer privacy. This is one of the main reasons that regulators frowned upon DiDi’s (NYSE:DIDI) public listing.
Meanwhile, in the property sector, Evergrande Group’s imminent default will harm millions of suppliers, contractors, and especially homeowners. The property management firm owes over $300 billion in debt and does not look like it will pay the funds back. Millions of investors who bought Evergrande property are waiting for construction to resume.
These macro headlines matter to the EV market because consumers have limited disposable income. As a high-end brand in China, the average Nio vehicle is 437,700 yuan (USD 68,000). Nio competes with premium brands like BMW, Tesla (NASDAQ:TSLA), and Audi. Plus, Nio EVs cost more than competitor vehicles on average.
Strong September Deliveries
In September, Nio delivered 10,628 vehicles globally, up 125.7% year-over-year. For the third quarter, deliveries grew by 100.2% Y/Y to 24,439 vehicles. Despite a chip shortage, the EV giant reported an all-time high in monthly deliveries. It delivered 5,260 ES6s, its premium 5-seat smart electric SUV. 1,978 deliveries were ES8s—Nio’s six or seven seater.The five-seater EV coupe SUV came in at 3,390 units delivered.
The Oct. 1 press release announcing these deliveries should have sent NIO stock higher. Instead, NIO shares traded in the low $30s before ending last week barely at break-even. At less than one-tenth of Tesla’s market capitalization, bullish investors cannot understand why Nio is down but Tesla is up. Nio trades at an unfavorable price-to-sales compared to that of Tesla. But Tesla has a better debt-to-equity ratio. That may matter more in the quarters ahead.
The Federal Reserve is set “taper.” But by lessening the financial support it provided during the pandemic, raising rates and purchasing fewer open market bonds, the Fed could hurt firms with debt.
Higher costs on loans are not Nio’s primary risk, however. Its quarterly losses are still a concern. In Q2, the company lost US$102.1 million. This is a decrease of 45.4% from last year. But even with share-based compensation expenses and accretion on redeemable non-controlling interests to redemption value excluded, Nio still lost US$52 million.
Nio has US$7.5 billion in cash and cash equivalents. It will not need to sell shares to fund its global expansion and research and development efforts.
Additionally, Nio has a battery swap program that earns steady subscription revenue. It also lowers the price of the vehicle and increases its affordability. Furthermore, customers do not need to wait at an EV pump to charge the battery. The battery swap saves time and increases customer satisfaction. Increasing EV affordability will matter in the months ahead. If China’s economy weakens because of the government’s deliberate deleveraging of real estate debt, EV sales may fall.
Investors who want to diversify from Nio may consider holding XPeng (NYSE:XPEV), too. XPeng trades at almost half of Nio’s market capitalization and has negligible debt levels. Tesla is also worth considering.TSLA trades at a premium but it’s worth it since Tesla benefits as the early adaptor in the EV space worldwide.
Seven analysts who rate Nio as a stock to buy have an average price target of around $62.00. The price target range is $47 – $72, according to Tipranks. Nio’s current growth score of 55/100 is a good start. And its quality score will improve as operating margins expand.
The Nasdaq is wavering while Nio is holding a steady price level at around $35.00. And October is typically a weak month for technology investors. Next month and early next year, continued growth in EV demand will lift Nio stock.
Now that Nio is done with selling shares to raise cash, it may focus on operating at break-even levels. As it posts profits after that, investors who appreciate the positive cash flow will build a bigger position in Nio. China will ease its regulatory crackdown next. This is another positive macro tailwind. The negative cloud around Chinese stocks will end, giving markets another reason to buy Nio stock.
On the date of publication, Chris Lau 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.