All is well in the electric vehicle (EV) world. Or is it? Tesla (NASDAQ:TSLA) shares may be rallying to new all-time highs after earnings, but that doesn’t mean the rest of the space is doing well. Take Nio (NYSE:NIO) for example. While NIO stock is up more than 20% from this month’s low, the stock is still down about 40% from the highs.
That’s a much different story than what we’re seeing with Tesla. TSLA stock has rallied for nine straight weeks and has completely ignored the correction in the stock market. Not to mention it’s back at new highs.
So where did NIO stock go wrong? Rather, perhaps we should be asking if this EV stock will be the next to go on a torrid run and make new highs. After all, Nio is no joke in this industry, like a handful of recent special purpose acquisition company (SPAC) offerings have become.
What’s Wrong With Nio?
Nio’s problem has less to do with EV momentum and more to do with its own execution.
In mid-August, the company reported earnings. While the results were solid — a top- and bottom-line beat — the Street wasn’t buying it. Literally. The stock fell in six straight sessions and in seven out of eight days. Amid the decline, NIO stock suffered a peak-to-trough decline of 21.9%.
We previously discussed the earnings report, so I won’t rehash it here. But to see a stock continue to slide (while the market was making new highs), after Nio more than doubled revenue and gave solid guidance is… concerning.
The company’s momentum suffered another downshift a few weeks later. In early September, NIO not only cut its third-quarter delivery guidance (the very guidance it has just given a boost to in its quarterly report) but soon after, the company announced a $2 billion capital raise.
The reduction in guidance was mostly tied to Covid-related issues in China and supply-chain constraints. That’s a better problem than a lack of demand.
That said, for a stock that trades at this high of a valuation, Nio has to have great execution. Look at Tesla. The company continues to operate incredibly well, which, along with the technicals, is one reason I’ve argued it’s going to a $1 trillion market capitalization.
When we look at Nio stock, the company commands a market capitalization of “just” $65 billion. That’s a big drop from the $90-plus billion market cap it had earlier in the year. While Nio had strong momentum, that valuation has always bothered me.
Nio is forecast to generate $5.6 billion in sales this year. However, in 2022 and 2023, analysts expect sales of $9.37 billion and $14.1 billion, respectively. That’s very impressive growth if Nio can achieve it.
Trading Nio Stock
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Right now, there’s not a momentum problem with EVs. In fact, one could argue that the industry has never been as strong as it is now. With Tesla stock at all-time highs, Nio stock’s lacking momentum says more about its own business than the EV business as a whole.
If the company can begin to execute at a higher level and the market is in a “risk-on” approach, then Nio stock should experience higher prices.
That said, keep in mind that this stock rallied over 3,000% from the 2020 low to the 2021 high in January. The rally from the low in 2019 is even larger. So for Nio to consolidate for a bit should be viewed as healthy price action.
The chart for Nio stock is pretty interesting. While we had a massive correction from the February highs to the lows in May, the stock has narrowly avoided making new lows, which is good.
We recently had a five-wave “ABCDE” correction down the low $30s before a pop higher. Now back above the 10-day and 50-day moving averages, let’s see that the stock price can stay above these measures. If it can, a test of the 200-day moving average and downtrend resistance (blue line) may be in order.
Below the monthly volume-weighted average price (VWAP) measure will leave NIO stock remaining vulnerable. With any luck, earnings will be enough to jumpstart the bullish story once again.
Otherwise, we have to be careful with Nio, which still commands a lofty valuation by auto-stock standards.
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.
