- Nio (NIO) stock fundamentals are solid.
- Extreme dips are buying opportunities.
- Current risks are mostly short term and transient extrinsic worries.
Nio (NYSE:NIO) has seen better years, in fact it is starting the week on a bad note. But the conclusion today is that dip has some strategic reasons to buy some. Whatever is ailing NIO stock now is transitory, eventually the fundamentals will prevail. Case in point, Chinese equities are falling Monday on large currency dislocation. The large differential between the U.S. Fed and other central banks are causing massive FX moves. Nevertheless, I will focus more on the the NIO stock technical bits because they are somewhat positive.
Last week the equity markets ended on a sour note. The last two days were systemically bearish and the S&P 500 fell 5.5% from high to low in two sessions. Therefore investor sentiment does not inspire better things to come. Nio showed some relative strength, even managed to close positive on a bloody Friday. That resolve is under threat this week, so investors ought to stay humble with their convictions.
There are more technical advantages hiding in the chart that favor upside. The opportunity could carry it back up to $20 per share. There is divergence between the stock internals and its two week trajectory. NIO stock is falling, while other internal studies are rising. Usually that indicates a potential reversion from the slide into a small rally. Even if this is a false alarm, the stock is also near its March lows. Often enough, when stocks fall into prior bounce levels they find buyers.
| NIO | NIO Inc. | $17.18 |
The Fundamentals Still Show Strength
Fundamentally, the news is still good because of the company’s financial metrics. They are growing sales aggressively, so there’s no reason to doubt its success long term. But Nio’s $1.6 billion net loss last year could be a repellent if it continues this year. Luckily, they also generated $299 million in positive cash from operations. This suggests that they are covering their own spending to deliver growth.
Valuation is tricky for companies that are in a hyper growth phase. In this case, NIO has a modest price to sales under five. This suggests that current owners of the stock have realistic expectations. Therefore, it will be harder to disappoint them in the near term. Nevertheless there is extrinsic risk from the war in Ukraine. There’s also vicious economic risk from the war that central banks are waging.
Specifically the U.S. Central Bank has declared a massive attack on the economy. They just spent trillions to get it to this level on purpose. Now they are panicking to kill it. The Fed could overshoot just like they did on the upside. The end result will be a huge drop in GDP in the next three months. Don’t look for expert opinions because there aren’t any. We’ve never seen these conditions before, so they are making it up as they go. That alone is risk enough to be cautious.
Accumulate NIO Stock Long Term
If you’re long on NIO stock, this is not the time to add to the risk because we don’t know anything new. For new positions I would only consider starter trades and not all in. Leaving room to add later is how we manage risk. Regardless of methods, I would treat this as a tactical trade with specific stop losses. If NIO falls below $17, it could easily slip another two from there and fill the gap near $15. If and when that happens, the tactical setup would be to buy that dip for a sharp rebound.
In the long term, I am optimistic about NIO’s success in the electric vehicle (EV) sector. It has an early mover advantage not quite as strong as Tesla (NASDAQ:TSLA) but respectable. They are growing the unit delivery numbers quite aggressively. Management even expressed interest in expanding overseas. Meanwhile, they operate in one of the largest hyper growth sectors.
China has a large enough market for them to win big there. But the rest of the world would be an open canvas for future growth. Their approach to battery packs is innovative. It sounds like a reasonable way to deal with the battery problem. There are better looking and more high-tech EV makers like Lucid (NASDAQ:LCID). However, Nio’s production is already up and running en masse.
On the date of publication, Nicolas Chahine 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.