Once Its Latest Rally Wraps Up, Nio Stock Could Shift Into Reverse

NIO stock - Once Its Latest Rally Wraps Up, Nio Stock Could Shift Into Reverse

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  • Investors are bidding up Nio (NIO) stock again amid easing worries about U.S.-listed Chinese stocks
  • A strong earnings report/guidance update could extend its rally
  • However, several factors could push the China-based EV maker’s shares lower in the months ahead

As it nears $20 per share, you may believe now’s the time to pounce on Nio (NYSE:NIO) stock.

It may seem like what’s playing out now is the start of a recovery. Still down massively from its all-time high set in 2021, even a partial recovery would mean big gains if you are buying Nio stock today.

Confidence in the China-based electric vehicle-maker’s prospects may be on the rise again. Even so, I wouldn’t assume it’s a smooth ride back to higher prices.

Sure, there may be enough in play to sustain its rebound in the near term. An easing of Chinese regulation fears could continue to drive investors back into shares. A strong earnings report/guidance update could do the same.

Yet between now and the end of 2022, many issues, both company-related and market-related, could push the stock lower again.

NIO Nio $19.81

Nio Stock and Renewed Bullishness

When I last wrote about Nio in late February, I discussed how the company’s earnings report could help renew bullishness for shares. But as we’ve seen play out during March, another factor brought back bullishness to shares sooner than I anticipated.

That would be concerns related to China’s regulatory crackdown. Besides inflation, rate hikes and the cooldown in EV mania, crackdown fears have been another reason why Nio stock experienced such a massive drop in price since 2021. However, recent remarks from Chinese economic officials signal the regulatory crackdown will end soon.

More importantly, remarks were made signaling that the Chinese government would be supportive of companies within its jurisdiction with overseas stock market listings. The market has taken this second bit of news to mean that Nio losing its New York Stock Exchange listing is now less likely than before.

As this sentiment shift continues, we could see more investors hesitant about China stocks due to delisting concerns hop back into it. The above-mentioned quarterly earnings report could also spark another move higher for shares.

Demand, Margin Issues Could Arise

Going forward, as it moves past the Chinese regulatory issues and investors place more focus on the EV maker’s expansion plans, you may believe that Nio stock has room to hit substantially higher prices than what it trades for today.

Deutsche Bank analyst Edison Yu’s latest price target for the stock is $50. Yes, Yu technically cut his price target (it was previously $70 per share). But the sell side analyst is confident that delivery numbers will surge from 10,000 to 25,000 per month by year’s end. To make his case, Yu cites an ease in supply shocks, plus the rollout of new models in both China and Europe.

Sounds like a slam dunk, right? Well, maybe not. It’s not definite that there will be enough demand to more than double its delivery numbers. Bullish investors will point to supply headwinds as the reason for its weak delivery numbers in recent months.

Yet if demand is truly “through the roof,” then why is the company opting to not immediately raise prices? Other EV makers, like Tesla (NASDAQ:TSLA) are doing so, due to soaring raw material costs.

This reluctance to raise prices gives credence to an argument on the stock made by my InvestorPlace colleague, Alex Sirois. As Sirois discussed, Nio doesn’t have the ability to raise prices like its established rival Tesla.

With this lack of pricing power, Nio’s gross margins will erode. The resulting heavier-than-expected losses could be a negative for shares. Especially as the market becomes less enthusiastic about companies that are posting high sales growth, yet remain far away from the point of profitability.

The Best Move Today For Nio

Over the next few quarters, if Nio’s expansion plans fail to pan out and its margins take a hit from inflation, it may prove difficult for the stock to extend its rally.

Not only that, like other U.S.-listed Chinese companies, it’s not fully out of the woods with regulatory risk. China may be easing on its crackdown. But the U.S. is moving ahead with its plans to delist foreign stocks that fail to allow U.S. regulators to inspect their audits. Concern about delisting could spike again, putting pressure on shares.

So, what’s the verdict with this EV play? You may want to tread carefully with Nio stock after its run-up in price. Many factors could send it lower again.

On the date of publication, Thomas Niel 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.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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