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Nio’s stock valuation won’t matter until the bulls lose control
By Bret Kenwell, InvestorPlace Contributor Feb 8, 2021, 8:10 am EST
Nio (NYSE:NIO) has been pretty quiet lately, with shares up just 2% since Nov. 24. For that matter, Tesla (NASDAQ:TSLA) has also been pretty quiet. However, this sideways consolidation is healthy for Nio stock.
Source: Andy Feng / Shutterstock.com
It doesn’t suggest to me that a massive decline is on the way. In fact, this type of price action bodes best for bulls. That doesn’t mean a correction can’t or won’t occur, only that the sideways chop should be viewed positively, given that the previous move was a large rally.
Here’s a friendly piece of advice: Stocks tend to correct in one of two ways, through time or through price.
If it’s the latter, investors can expect an explosive rally to correct via a sharp decline in price. That decline can temporarily erase weeks’ worth of gains in a few days or months’ worth of gains in a few weeks. The drop can be (but isn’t always) painful and gets the emotions flowing.
Correcting through time is different, as the stock price chops sideways. This type of range-bound trading can be frustrating too, filled with plenty of false breakouts and breakdowns. However, it’s the least painful type of correction.
Is that what Nio stock is giving us?
Trading Nio Stock
Click to EnlargeSource: Chart courtesy of TrendSpider
You don’t have to look too far back on the chart to see when Nio stock was sub-$25. It went on a massive run, peaking in the mid- to upper-$50s before pulling back and settling down a bit.
That dip was met aggressively on each test of the 10-week moving average.
Near the end of December, Nio broke out over downtrend resistance, then it broke out over $54.20 in January. This level has recently been acting as support amid Nio’s recent consolidation.
To gain some upside momentum, Nio stock needs to reclaim its 10-day and 21-day moving averages. Clearing the current downtrend resistance would also be a bullish sign, along with a move over the $60.70 level.
That could put the highs in play near $67, followed by the 161.8% extension near $69.
On the downside, losing $54 as support could put the 10-week and 50-day moving averages on the table. Given how supportive these measures have been in the recent past, traders will likely buy them on the first test. If they fail as support, $50 or lower is possible.
Keep in mind, it’s completely possible that Nio stock trades sideways for considerably longer. It could lose current support (~$54) and trade between $40 and $60 for a year, for instance. There’s no way to really know what it will do with a high degree of certainty, but be aware of multiple possibilities.
Breaking Down Nio
The electric vehicle (EV) space has been hot. Tesla sports an $800 billion market capitalization and Nio has eclipsed a number of traditional automakers with its size too.
Does the company deserve its valuation? In my opinion, no. But that hasn’t stopped the stock from being a relentless bull. When I last looked at Nio stock, I acknowledged as much, saying that the trends remain bullish but the valuation makes no sense.
That doesn’t take away from all of the good things it’s doing, but it’s the reality. Deliveries are going incredibly well, particularly for a pandemic year. It couldn’t have done better than by partnering with Nvidia (NASDAQ:NVDA). Nio’s capital structure and raises were wise and creative over the last 18 months.
EV stocks are clearly demanding a premium at this moment, that much is clear. While there is a lot of opportunity in China, a $90 billion market cap is high. Should it be worth more than General Motors (NYSE:GM) or Ford (NYSE:F) though?
Nio isn’t profitable or cash flow positive and with forecasts for $5 billion in sales in CY 2021, it leaves Nio stock trading at about 18 times revenue. On the two-year estimates, it trades at more than 10 times revenue.
Some high-quality, software-as-a-service companies trade at a valuation like this. Admittedly, Nio is forecast to grow revenue 100% in 2021 and more than 70% in the following year. Yet I can’t help but be critical of these valuations.
The Bottom Line
“A trend is your friend until it bends.”
Those who blend fundamentals and technicals can be objective with their observations and takeaway.
Is Nio stock overvalued? In my opinion, yes. Can Nio continue higher? Yes, because the trend is in its favor.
Investors should receive very little criticism for being bullish because that’s what the trend favors. The trends in its business are strong and the trends on the chart are too. If either one of those observations changes, then the valuation will likely become a factor.
For now, it’s not. So we remain cautiously bullish until that changes.