China-based electric vehicle manufacturer Nio (NYSE:NIO) needs a positive catalyst – the sooner, the better. Otherwise, it will to be hard to justify the NIO stock rally that’s been in progress since early June.
Nio’s shareholders should be prepared for a pullback, and might even consider selling before it’s too late.
Nio still has to compete against rival EV manufacturer Tesla (NASDAQ:TSLA) as well as Chinese automakers. There was a bit of positive news on that front, but now it appears to have been canceled. All in all, 2023’s second half could be rough for Nio and its investors.
Good News and Bad News for NIO Stock
Not long ago, Morgan Stanley analyst Tim Hsiao considered NIO stock a “show-me” stock. It will “take a few more rounds of guidance ‘meet or beat’ to fully restore market confidence in NIO, in our view,” Hsiao declared.
I tend to agree with Hsiao’s misgivings concerning Nio. The automaker delivered 10,707 vehicles in June 2023, which is around 17% less than the 12,961 vehicles that Nio delivered in June of last year.
Furthermore, as Eddie Pan pointed out, Nio’s vehicle deliveries for the three months ended June 30 were down 6% year over year.
Yet, NIO stock jumped from around $7.50 at the beginning of June to more than $10. There was some optimism recently as Tesla and 15 other EV manufacturers in China, including Nio, signed a fair-competition agreement brokered by the China Association of Auto Manufacturers.
The participating automakers reportedly pledged to avoid “abnormal pricing.” Nio would have benefited from this agreement, as it may have prevented Tesla from slashing its EV prices in China.
However, it appears that CAAM has just canceled this pact. So, that potentially positive catalyst for Nio is evidently dead on arrival.
Nio’s Chief Executive Lodges a Complaint
Speaking of competition from Tesla, Nio CEO William Li reportedly complained that Tesla has unfettered access China’s EV market. At the same time, Li alleges, Chinese companies have to deal with tariffs and regulations in the U.S.
Li’s contention may be valid or not, but that’s a matter for a separate debate. Investors must be realistic about the prospects of fair trade actually occurring anytime soon between China and the U.S.
Nio’s chief executive can certainly discuss perceived fair-trade barriers, but the investing community is looking for execution on Nio’s part. Thus, we circle back to Hsiao’s characterization of NIO stock as a “show-me” stock.
It’s probably the best policy for prospective shareholders to just sit on the sidelines and wait for Nio’s upcoming operational and financial results.
NIO Stock Could Cough Up Its Gains
Nio just lost a major catalyst as the CAAM-brokered price-war truce is now canceled. Despite Li’s complaint, Sino-U.S. tensions linger and the fair trade he’s seeking isn’t likely to materialize anytime soon.
Therefore, while the rally in NIO stock has been impressive, it’s probably not sustainable. Be prepared for a possible decline in the Nio share price, and think carefully about the risk-to-reward proposition if you’re considering investing now.
On the date of publication, David Moadel 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.
