When trading volumes surged to record levels, that may have signaled the end of Nio’s (NASDAQ:NIO) rally on the stock market. NIO stock peaked at $16.44 in early July, driven by three positive catalysts.
Strong monthly delivery numbers, China-based stocks trading at new highs, and hype on Tesla (NASDAQ:TSLA) gave Nio shares a lift.
With profit-taking dominating the stock’s direction, will Nio trade at 16 – $20 in the future?
U.S.-China Tensions Hurt Nio Stock
Last week, China, as predictable as it is, retaliated after the U.S. ordered the closing of the China consulate in Houston.
China responded by ordering the closure of the U.S. consulate in Chengdu. The poorly timed tensions between the two mighty countries is an unlucky development for Nio shareholders.
Macro political risks will put pressure on the stock’s valuation. And now that all three catalysts are gone, chances are high that Nio will underperform in the near-term.
Strong selling with Nikola (NASDAQ:NKLA) shares is not helping Nio, either. The company filed to sell up to 53,39 million shares. After the announcement on July 17, the stock broke down from the $50 support level.
Chances are high that Nikola will trade back to Initial Public Offering levels in the $10 range in the months ahead. Unfortunately, the cash raised is perfectly timed to benefit Nikola and not its shareholders.
Its drop officially marked the end in the Electric Vehicle hype that began in May 2020 and ended at the beginning of July 2020.
Goldman Sachs Downgrade
Analysts are often late in their buy and sell calls but investors cannot ignore Goldman Sachs’ (NYSE:GS) bearish note on July 17. The firm warned that Nio’s valuation was too high. It cited that enthusiasm for EV adoption in China will not increase delivery volumes from previous months. Plus, profit expectations are no different over that period.
Goldman started a severely bearish tone when it set $7.00 price target.
Fundamentally, Nio’s liquidity is stronger than ever. The company secured a new $1.5 billion credit line on July 10. This effectively removes any bankruptcy risks.
Management learned from a few quarters ago when sales were slumping, its cash on hand was running low. The lockdown in China hurt sales and put Nio in a dangerous liquidity crunch. Now that China re-opened, the worst is behind it. And Nio is in a good position to invest in its business with the available cash.
Growth Catalysts
Nio may expand its sales force, open a few more small stores, and bolster its online site to grow unit sales in China. Strong deliveries may lift the stock again.
Still, a euphoria on EV stocks fueled the last rally. Without strong buying interest for Tesla stock and the recent plunge in Nikola stock, Nio will more likely settle at lower levels.
Tax credits and other incentives in China may give Nio a gradual lift in sales in the months ahead. If Nio falls back to the high single-digits, investors may be on Nio’s EV dominance in China at a better price.
Price Target and Your Takeaway
According to Stock Rover, Nio’s profitability is still very poor:
| Stock | Industry | S&P 500 | |
| Quality Score | 8 | 55 | 79 |
| Gross Margin | -15.20% | 17.00% | 29.00% |
| Operating Margin | -132.60% | 4.30% | 13.00% |
| Net Margin | -138.60% | 3.00% | 8.50% |
To Goldman Sachs’ credit, margins are still too weak. Nio will have to expand its business and increase its addressable market in China and worldwide first. Otherwise, the investment is still a dangerous speculation with downside risks.
Nio still needs production scale and demand growth to reach profitability. The negative numbers in the above table suggest that the stock is still risky speculation.
Conservative investors should stay away from Nio shares for now. Let the speculators bet on the rebound instead.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.