After going parabolic last month, Kaixin Auto (NASDAQ:KXIN) stock is falling back to earth. But, even with speculators cashing out, is there big opportunity with this play on Chinese automotive play?
Source: lumen-digital / Shutterstock.com
Not so fast. Sure, there are many trends in motion that support the bull case for this used car dealer. With China’s rising middle class, Kaixin has the opportunity to scale into a massive business in the coming years.
Yet, one can argue it was speculation from U.S. investors, not new developments, that were behind its epic moves in October. With Chinese EV sales on the rise, investors are looking for any sort of exposure to this megatrend.
But, while it’s in the automotive business, Kaixin’s exposure pales in comparison with the many Chinese EV stocks available to U.S.-based investors.
So, as shares trend lower in the past few weeks, what’s the play now? Granted, with this stock’s volatility, it’s far too risky to short. But, given the company’s weak fundamentals, it’s far from being a buy.
Simply put, sit on the sidelines with this speculative play with questionable EV exposure, and consider more direct plays on this megatrend.
KXIN Stock and Its Epic October Rally
Why did shares in this lesser-known Chinese automotive play set the world on fire last month? As InvestorPlace’s Louis Navellier discussed Oct. 27, the company itself was surprised about the stock spike. With no new material changes since August, Kaixin’s strong performance wasn’t due to positive news out of the company.
OK, so what was really behind the stock’s move from 50 cents per share to prices as high as $13.40 per share? Chalk it up to speculation. As I said above, investors are chomping at the bit to bet on the rise of EVs in China.
With the strong growth in Chinese EV sales, it’s no surprise want exposure to this trend in their portfolios. But, this operator of used car dealerships is a far cry from pure plays like EV manufacturer Nio (NYSE:NIO).
Yet, for those buying on speculation, not on fundamentals, the details weren’t a big concern. And those who dived in early, without doing their homework, still won big as shares soared in mid-October.
But those who dived in as this penny stock quickly become a hot stock? They could wind up holding the bag. Why? Taking a closer look at this company’s prospects, it’s clear not only is this name not really an EV play. And its actual business (regular used luxury car sales) isn’t doing so hot.
Diving Into Details, It Doesn’t Look Good for Kaixin
Sure, KXIN stock really isn’t a play on Chinese EV growth. But its main business (selling used luxury cars) may still have potential. While the place where the novel coronavirus first started, the country’s fully in recovery mode from the pandemic. Coupled with the continued growth in China’s middle class, there could be massive runway for what’s considered a mature industry over in the states.
Yet, while there’s opportunity for Kaixin to expand from its current handful of locations, a closer look shows prospects are far from rosy. As I referenced above, the company released a statement announcing surprise over the stock’s big spike in October. In the statement (emailed to MarketWatch.com), the company reiterated that there hadn’t been any material changes since August.
And what was the material change in August? The company’s halting of its used car operations. With its main business suspended, Kaixin disclosed it would have “significantly lower” second quarter numbers. But numbers for the third quarter could be even worse, with the company stating the possibility of not having “meaningful revenue” starting in that period.
In short, not only is this company not getting tailwinds from Chinese EV growth. Its main business (used car sales) remains mothballed. With the widespread release of this info, it’s no shock shares cratered significantly from their October highs.
And, with signs the company is far from thriving, it would be no surprise if shares dipped further in the coming weeks. While the risk of another round of speculation may make KXIN stock too risky to short, the tepid fundamentals clearly demonstrate this isn’t a stock to buy on the pullback.
Don’t Short, But Don’t Buy the Dip
So, what’s the verdict on this Chinese used car dealer? While rising EV sales bode well for China’s automotive industry, this trend does little to boost the fortunes of Kaixin in the near term. Coupled with the company’s still-suspended operations, and it’s clear there isn’t much to help support the stock, even at today’s prices (around $3 per share).
Shares may be too risky to short, but this is hardly a “buy the dip” situation. Given its shaky fundamentals, ignore the hype, and avoid KXIN stock.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.