Is now the time to “buy the dip” in Nio (NYSE:NIO) stock? Not so fast! Earlier this year, the Chinese electric vehicle (EV) maker seemed headed for disaster. But,a partnership deal with a Chinese municipality put bankruptcy concerns to rest. Add in the mania in EV stocks driven by Tesla (NASDAQ:TSLA), and this stock has more than proved the bears wrong.
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Those who were “long and strong” have seen big gains (347.3% return so far this year). Those who went short on Nio stock? Nothing but heavy losses and heavier regret.
Yet, this strong performance doesn’t mean the “Tesla of China” has additional runway. In fact, shares could head lower in the coming months.
How so? Firstly, the recent secondary offering. As our own Mark Hake wrote Aug 31, Nio is seizing the moment, raising as much as $1.5 billion. The dilution from this transaction is tiny (less than 10%). Yet, investors owning shares today now have a smaller piece of the pie.
Secondly, there’s another pure-play Chinese EV stock now trading on the U.S. public markets. So far Nio’s been the only game in town for American investors looking for Chinese EV exposure. With more options out there, some may parlay their gains from this stock into this new opportunity.
Thirdly, fundamentals could start to have an impact. So far, speculators looking to profit from the “next Tesla” have cut this company a lot of slack. This company’s heavy losses may start to be a larger concern than it’s been previously.
So, what’s the call? If you bought at lower prices, it’s time to cash out. If you didn’t? Don’t buy this pullback.
Can Nio Stock Ride Out Dilution, Competition, and Heavy Losses?
Continued delivery growth, along with the “Robinhood effect,” helped to send shares skyrocketing through the summer. But, in the months ahead, these positive drivers could be replaced with negative ones.
First, the share offering could fuel an additional sell off in Nio shares. The stock today ($17.28 per share) may be just slightly above the offering price ($17 per share). But investors, fearful this is a sign valuation has gotten ahead of itself, may use it as a reason to exit their positions.
Sure, this alone won’t push shares materially lower. But, this isn’t the only negative factor on the horizon. As I mentioned above, there’s now a new way for U.S. investors to bet on the Chinese EV megatrend. InvestorPlace’s Chris Lau broke it down in his Sep 1 article. The company, XPeng (NYSE:XPEV), may have its flaws. Yet, investors, going from betting on the “next Tesla” to betting on the “next Nio,” may sell their shares in this company, and parlay it into a wager on XPeng.
Again, this may not the stock price much. But, that’s not all! The largest factor that could drive shares lower is the underlying fundamentals. Granted, it’s been the “story” (the rise of EVs in China) instead of fundamentals, that’s been important this year.
But, as the “EV Bubble” cools down, and investors take a closer look at the names in this sector, fundamentals are going to have more of an impact. And, in the case of Nio, investors may start to be more cautious, sending shares lower.
Why Today’s Valuation is Not Sustainable
I concede it’s not fair to value a growth stock on present results. This company’s $24 billion market capitalization is based on its future growth potential, not its current fundamentals. But, at today’s valuation, investors have more than priced-in the company’s potential in both its home turf and international markets.
Comparing enterprise value/sales (EV/Sales) ratios, Nio trades at a multiple (18.4) on par with Tesla’s (15.5). Yet, while Tesla is profitable, this company remains deep in the red.
Granted, the company is no longer posting negative gross margins. But, with heavy overhead costs, Nio continues to post quarterly losses in the hundreds of millions. Yes, these heavy expenditures are necessary, as the company scales into a major automotive maker.
However, with Wall Street projecting losses both this year and next year, investors could soon be asking “where’s the beef?” If its clear this company’s presumed ascension to the top of the Chinese EV heap is more hype than fact, don’t expect shares to remain at today’s price levels for long.
With The Easy Money Already Made, It’s Time to Cash Out
Investors who got into Nio when Wall Street was pricing it for disaster have seen big gains thanks to “EV fever.” Nobody but the most dyed-in-the-wool EV bulls could have predicted this sector would perform so well this year.
But, as investors take profit with Tesla, it’s time to do the same with Nio stock. With shares more likely to head lower than higher, we may have reached a near-term top.
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.
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