Shares of Chinese premium electric vehicle maker Nio (NYSE:NIO) went vertical in 2020, with NIO stock soaring from a low of $1.50 in late 2019, to a high of nearly $70 in early 2021.
That’s one of the biggest, fastest and most furious rallies anyone has ever seen in Wall Street history — and if you were subscribed to our bold, new financial newsletter, The Daily 10X Stock Report, you could’ve been one of the first to join that wild ride.
After all, in that newsletter, we told subscribers that NIO stock was a strong buy when it was trading for just $4. To read more about that newsletter — which is aimed at getting you in early on the biggest breakout stocks in the market — click here.
But back to NIO, stocks don’t go up in straight lines. And after a 45X rally in twelve months, Nio’s stock was due for a breather. We are finally getting that breather thanks to broader market fears about rising interest rates, which have sent NIO down more than 25% over the past month.
Such a dip is what we refer to as a “golden” buying opportunity!
Why? Three big reasons:
- The rising rates fear that is spooking the stock market — and specifically growth stocks like NIO — is completely overblown. It will pass, soon, and without inflicting much more damage.
- Nio’s stock is fundamentally undervalued at $50 relative to the company’s long-term earnings growth potential in the global electric vehicle market.
- The technicals underlying NIO imply that shares have bottomed, and are in the processing of reversing course back into a long-term healthy uptrend.
All in all, it’s time to go ahead and buy the dip in NIO.
NIO Stock: Rising Rates Fear Is Overblown
The first reason to buy the dip is because the catalyst for recent weakness — a sharp rise in the 10-Year Treasury yield — is overblown.
The benchmark 10-Year Treasury yield has risen sharply in February. It has gained almost 50 basis points. That’s a historically fast upswing in yields. And it’s troublesome for growth stocks, because valuations are inversely correlated to Treasury yields. In theory, higher yields mean lower valuations.
But yields have overshot their “fair value”, and will start to settle down in the coming months.
The 10-Year Treasury yield has, over the past five decades, closely tracked the 3-Month Treasury yield (a proxy for inflation, which the Fed controls with its target interest rate) plus real GDP growth. The correlation is incredibly strong.
In today’s numbers, that means the 10-Year Treasury yield should finish 2021 at 2% — since the Fed has promised not to move on rate hikes (implying a near-zero 3-Month yield) and real GDP growth after the 2021 “bounce back” is projected at a 2% run-rate over the next few years.
Let’s do the math: 0% 3-Month yield + 2% normalized real GDP growth = 2% 10-Year Treasury yield.
Now, importantly, the Fed has promised to remain on hold for three years, and there are massive deflationary forces via globalization and automation that should keep inflation muted for the foreseeable future.
Thus, the 3-Month yield will likely hover around 0% for the next few years, while real GDP growth will continue to hover around 2%, meaning the “fair yield” on the 10-Year Treasury will remain around 2% for most of 2022 and 2023.
We are at 1.4% today. That means yields aren’t going to rise much over the next few years — and that the widespread rising rates fears today are completely overblown.
Yields will calm down. And soon. Once they do, growth stocks — like NIO — will kick back into gear.
NIO Stock Is Fundamentally Undervalued
The second big reason to buy the dip is that shares are fundamentally undervalued today relative to the company’s long-term earnings growth potential.
NIO is China’s most dominant premium EV maker, with unrivaled technology and brand equity. On that basis alone, NIO has tremendous long-term revenue and earnings growth potential, since China is the world’s largest auto market and the government there is aggressively supporting EV adoption.
Thus, long-term, China will turn into the world’s largest EV market. NIO is right at the epicenter of that market, with a home-grown brand and industry-leading technology.
But NIO is much more than a China story. Outside of Tesla (NASDAQ:TSLA) and maybe Lucid Motors (NASDAQ:CCIV), there are no other companies in the world that can rival NIO in terms of battery technology and brand equity. That means NIO can — and will — turn into a global company that, by 2025-plus, will be selling a lot of electric sedans and SUVs in North America and Europe.
After factoring in the global growth potential, it becomes clear that NIO is way undervalued today.
My modeling suggests that NIO is on track to do about $6 in earnings per share by 2030. Based on a 25X forward earnings multiple and a 10% annual discount rate, that implies a 2021 price target for NIO stock of nearly $70.
Technical Support Is Here
The third big reason to buy the dip in NIO is that technical support has arrived for the stock.
Over the past year — during NIO’s torrid rally — the stock has formed a solid support line in its 100-day moving average. That is, the stock has never broken below that 100-day moving average over the past year.
Last week, the NIO stock price dipped to that 100-day moving average. It held there, and the stock price has since reversed course into a mini-uptrend.
This price action is technically indicative of a stock that just bottomed.
Bottom Line on Nio
Let’s not overthink this one. EVs are still taking over the world. China is still the world’s largest auto market, with an aggressive agenda to support widespread EV adoption. Nio is still the most adept Chinese EV maker. The company is still on track to sell millions upon millions of EVs over the next several years.
Nothing about these truths has changed over the past few weeks. Interest rates have just surged higher. They will stop surging, and soon. Once they do, NIO stock will resume on its long-term uptrend. So, buy the dip while prices are still discounted.
When all is said and done, NIO is still one of the best growth stocks buy and hold for the long haul.
But it’s not the best growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s how his Daily 10X Report has averaged up to a ridiculous 100% return across all recommendations since launching last May. Click here to see how he does it.