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Avoid Nio Stock As It Enters Full Bubble Mode

Thomas Niel
·5 min read

Near the $50 per share price level, will Nio (NYSE:NIO) climb even higher? It’s possible. After a strong earnings report, investors remain confident in the China-based electric vehicle (EV) maker’s prospects. Sure, its projected growth makes it worthy of a premium valuation. Yet, it’s questionable whether today’s share price overestimates its long-term prospects.

A Nio (NIO) store at night in Shanghai, China.
A Nio (NIO) store at night in Shanghai, China.

Source: Robert Way / Shutterstock.com

How so? As it stands now, the company sports a market capitalization of $67 billion. Compare that to General Motors (NYSE:GM), which currently has a $61 billion market capitalization. I know, apples to oranges. Unlike this company, GM isn’t going to nearly double its revenues in the coming year.

But, it’s debatable whether Nio can sustain its current level of growth. On one hand, with “new energy vehicles” set to make up 20% of Chinese car sales by 2025, and 50% by 2035, you can’t doubt there’s significant potential runway here.

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On the other hand, Nio doesn’t exactly dominate its home market. The company has scores of competitors in China. Not only that, U.S.-based EV names like Tesla (NASDAQ:TSLA) have a big presence in China as well.

In short, only time will tell if this is the “next Tesla,” or a “story stock” that rose too far, too fast. But, with shares still in “bubble mode,” it’s too risky to go long (or short) at today’s prices.

Nio Stock: Earnings and What Lies Ahead

With its recent strong quarterly results, shares are holding steady near their all-time highs. Beating revenue estimates, and with its losses narrowing from the prior year’s quarter, its past financial issues look to be in the rearview mirror.

But, recent results aren’t the only thing for investors to get excited about. With an anticipated ramp-up in both its vehicle offerings, along with its much-touted “battery-as-a-service” business line, if there’s one thing Nio isn’t lacking, it’s catalysts.

Coupled with the overall soaring demand for EVs in China, it seems inevitable this “winner can keep on winning.” That is to say, this top performing stock of 2020 could head even higher in 2021.

Yet, who’s to say these catalysts aren’t already more than priced into shares? Coupled with the fact shares may be heading higher due to factors of little relevance, the stock’s skeptics may finally be proven right in the coming year.

The Bears Could Call It Right in 2021

Those more bearish on Nio have had to eat humble pie so far in 2020. But, while proven wrong many times this year, those bearish at today’s prices may be making the right call.

How so? Namely, because much of the stock’s recent rise is due to pure speculation, not a continued acceleration in its future potential value. Yes, a lot of the 75%+ run-up in the past month is due to its strong EV delivery numbers, and its solid earnings report.

But, you can’t deny that the following three factors haven’t played a role as well. Firstly, Joe Biden’s victory in the U.S. Presidential elections. Sure, his pro-EV policies are a positive. But, it’s not set in stone his administration will fully reverse his predecessor’s China policies. In short, it’s doubtful Biden’s win helps or hurts Nio’s prospects when it comes to entering the U.S. EV market.

Secondly, analyst price targets are playing catch-up with Nio’s soaring stock price. Yes, as the company outperforms expectations, a boost in price targets makes sense. But, are these increases a reaction to stronger results, or a reaction to a surging share price?

Thirdly, the continued piling into “story stocks” by retail investors. Sure, “winners keep winning” has been the mantra for stocks in 2020. But, this may be an investing strategy that works until it doesn’t.

Simply put, with factors not very relevant to its prospects pushing shares higher, we could be nearing a top. While that doesn’t mean shares can’t head higher, it does mean buying it today is more like gambling than sound investing.

Irrational Exuberance or Wise Investing? All Bets are Off

Fun fact about Nio: it’s Chinese name (Weilai), literally translates into English as “blue sky coming.” But, while investors have priced this as if it’s blue skies ahead indefinitely, it’s questionable whether today’s prices accurately reflect its bright future. Or, if speculators have irrationally priced this as if its not only the “next Tesla,” but the next major global automaker as well.

With this in mind, it doesn’t seem prudent to go either long (or short) this name. Buy now, and you could wind up “holding the bag.” Go short, and you could sustain heavy losses as this company doubles its share price yet again.

So, what’s the play here? With the jury still out on whether today’s share price is rational or irrational, skip out on Nio, and look for opportunity elsewhere.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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