As The Hype Starts to Fade, Steer Clear of Nio Stock

With shares slipping since its launched inventory offering, what’s next for Nio (NYSE: NIO)? Nio inventory went from zero to hero in 2020. The Chinese language electric vehicle (EV) maker change into working on empty earlier this 12 months. When the unique coronavirus brought China to a cease, the firm looked mercurial headed to slay.

Nio stock

Nio inventory

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Supply: Andy Feng /

But, thanks to a money infusion from a Chinese language municipality, coupled with a fleet recovery in Chinese language EV quiz, and Nio’s been considered one of many prime performing stocks of 2020. Shares like soared 982% to this point this 12 months. Surging provide numbers like played a characteristic on this inventory’s blockbuster performance. Yet, you would’t disclose the impression of the “EV Bubble.”

That is to claim, chalk up the lion’s share of its beneficial properties to hypothesis, no longer improvements in its fundamentals. Decided, with the pivot to EVs accelerating (especially in China), the enthusiasm for this inventory is considerably justified. But, no longer to the extent we see now. At at this time time’s prices, Nio trades for 26.3x estimated 2020 gross sales.

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Even when factoring in its anticipated gross sales development (higher than 100% between 2020 and 2021), this valuation might maybe well no longer be sustainable. Add in extra than one components in play (or presumably in play) that will maybe well negatively like an impression on the inventory in 2021.

Build it all collectively, and it’s sure probability/return is no longer on your prefer at at this time time’s prices.

Nio Stock Performance in 2020: Altering Fundamentals, or Investor Irrationality?

Long-time bears of this firm (including myself) like had to spend humble pie in 2020. Factual fancy with Tesla (NASDAQ: TSLA), this has been a topic the save the skeptics had been consistently proven notorious. Yet, is that this a topic the save bears had been proven notorious due to this of higher-than-expected results? Or, is it a case of markets being irrational longer than short-sellers can remain solvent?

Whereas I lean against the latter plan cease, I concede it’s quite of column A, quite of column B. In the case of a changing fundamentals, the firm has pulled off a 180. Rebounding from the brink, with consistant 100%+ provide development previously few months, it’s been higher than the “EV Bubble” that’s sent this China EV play higher this 12 months.

But, it’s sure the mantra of “development at any imprint” has additionally helped to sustain its stable performance. Because the story at the abet of this “myth inventory” holds, traders might maybe well continue to “plan cease on the rumor, plan cease extra on the guidelines.”

Yet, what if its no longer all “blue sky coming” (per the translation of its Chinese language title) for Nio inventory? With many opposed components at play, or on the horizon, shares might maybe well be space to provide up a upright chunk of their beneficial properties in the impending 12 months.

3 Components That Can also Push Shares Lower in 2021

There’s masses at play to interpret extra moves higher for Nio inventory. With Wedbush’s Dan Ives awaiting “understand-popping” Chinese language EV quiz over the next two years, the firm might maybe well no longer simplest meet, however beat, contemporary development expectations.

Yet, it’s no longer all a slam dunk from here. Why? Firstly, whereas quiz in China is heating up, however so is the competition. Decided, traders are properly responsive to Nio’s rivals. These comprise Tesla (NASDAQ: TSLA), however additionally home-grown EV visitors fancy Xpeng (NYSE: XPEV) and Li Auto (NASDAQ: LI).

But, as short seller Citron Compare detailed in a November “short file” on Nio inventory, aggressive pricing by Tesla of its Model Y in China might maybe well difficulty this firm’s gross sales development. If deliveries and gross sales fail to double next 12 months, it’s laborious to see traders persevering with to imprint shares at at this time time’s valuation.

Secondly, whereas many like coined this firm the “Tesla of China,” lengthy-term it will perchance maybe well fail to are living up to this moniker. Why? As this Attempting for Alpha contributor opined in a up to date article, Nio’s dependency on teach-owned auto maker JAC Motors for manufacturing might maybe well limit its capability to innovate. Decided, that doesn’t limit its capability to scale into a a success endeavor. But, it will perchance maybe well signal this firm’s capability runway isn’t as lengthy as contemporary valuation suggests.

Thirdly, with the “EV Bubble” losing steam, investor enthusiasm might maybe well very properly be tapped out. Add in the truth short-hobby has fallen considerably in 2020 (but any other point made by Citron), and traders can’t even rely on a transient squeeze to support gasoline additional moves higher.

Build it all collectively, and it’s easy to see shares heading lower over the next twelve months.

Risk/Return No longer Powerful in Your Favor, So Live Away for Now

Decided, the “blue sky coming” story aloof holds for Nio. But, with its possibilities higher than priced-in, and components in circulation (or around the nook) that will maybe well reverse some of its 2020 beneficial properties, procuring shares at at this time time’s prices (even after the contemporary dip) might maybe well no longer value the probability.

Give it but any other seek if EV stocks originate a huge correction in 2021. Yet, for now, keep a ways off from Nio inventory.

On the date of e-newsletter, Thomas Niel did no longer (both directly or no longer directly) sustain any positions in the securities talked about on this text.

Thomas Niel, a contributor to InvestorPlace, has written single inventory diagnosis since 2016.

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