There is no doubt that the electric vehicle market will continue to grow in the long term. While there are temporary headwinds decimating the segment right now, investors need to understand that it will eventually turn around, and when it does, I see it taking off quickly.
As for NIO (NIO.US), the recession has hit it harder than many of its peers due to its being based in China, short-term disruptions to its production and supply chain, the wrong assumption of that it is falling behind its competitors in delivered vehicles, although serving a different consumer base, and of course the risk-averse economic environment associated with upcoming interest rate hikes to combat rising inflation .
Let's take a look at what can be done with NIO in current market conditions, and why it's important to compare the same metrics when comparing NIO to its peers, and what to watch out for as stock holders respond to stock price rebounds. of NIO. .
NIO and its Chinese competitors
There are a couple of important factors to consider when comparing NIO to its two main local competitors, such as vehicle deliveries. First, NIO is operating from a much higher baseline (customer profile) than its competitors, and second, it competes in a different market segment than Li Auto (LI.US) or Xpeng (XPEV.US).
For example, when a company sells a lower cost vehicle, there will of course be higher demand. NIO, which currently competes at the high end of the EV market, doesn't even compete with Xpeng in that regard.
Still, there are headlines claiming that NIO is losing out on the Chinese market based solely on deliveries, not taking into account the lengthy modernization of the major production facility in anticipation of the launch of electric vehicles that will compete at different price points in the coming months. and years.
As for delivery numbers:
- NIO had 10,878 in November; 10,489 in December; 9652 in January; and 6,131 in February.
- Li Auto delivered 13,485 in November; 14,087 in December; 12,268 in January; and 8,414 in February.
- XPeng delivered 15,613 vehicles in November; 16,000 in December; 12,922 in January; and 6,225 in February.
With production ramping up and new vehicles launching in 2022, NIO's share price will skyrocket during the second half of the year, and probably not after. But it could be earlier if it surprises in the second natural quarter (April-June). It is not that we are making a fundamental assessment, but after the second quarter report, with the impact of the war, many unknowns could be resolved. But also, the significant impacts of COVID-19 during the rest of the year.
The bottom line for NIO when compared to its peers is that it must be done in a way that the same parameters are compared. The broader market is still not discerning it, which is why NIO has fallen much more than its two Chinese peers, as the chart below shows.
Why has NIO been so successful?
Beyond the perceived lack of performance against its competitors mentioned above, there are a couple of other reasons why NIO has been crushed.
The first is the fact that it operates in China, which has raised unwarranted fears that it will be delisted or ADR in the United States, as a handful of other Chinese companies have done. I wrote an article on the topic of fear of delisting and why I think it has been blown out of proportion.
At the time, NIO had no alternative exchange investors to gravitate to if there were to be a delisting. That recently changed when the company announced that it would be listed on the Main Board of the Stock Exchange of Hong Kong Limited. The market largely ignored the news, suggesting that there really wasn't that much concern about the issue.
The other big concern is rising inflation and the Federal Reserve's response to the issue. For a time, it was believed that he would take aggressive action to curb inflation, but now he appears to be more moderate in his response. That is a potential positive catalyst for NIO, but the market may be waiting to see if Jerome Powell's dovish comments are reflected in tomorrow's upcoming first rate hike.
The macro economy, coupled with lower deliveries than the market expected, are the key factors why NIO's share price has tumbled worse than its peers.
On the other hand, because NIO is oversold, it also has a significant chance of rising much faster and higher than its competitors, measured in relative terms, thus in percentages.
Trading with NIO in a challenging environment
There are times when the best trade to take in unfavorable market conditions is to take no trade at all. So, if you're not at NIO yet, this is probably the first thing you should consider.
With that being said, the price of NIO is approaching levels we may never see again once it starts to change direction regarding vehicle deliveries. When that happens, it will have a high potential to take off.
If, on the other hand, we think that now is the time to enter NIO, there are two things that we must consider. First, decide how much you want to invest in the company, and second, make sure you average the dollar cost over time due to the volatility your share price is experiencing right now as a result of currency changes. , if our account is in euros.
What if I already had a position at NIO?
A lot of this doesn't help those already in NIO. But there are a few things to think about if we buy the company at a higher price than it is today.
The first thing to ask yourself is whether the electric vehicle market is sustainable in the long term. I think the answer to that is obvious, so in that sense it's an advantage for NIO even at a high entry point.
Another thing to consider is whether it's worth cutting losses to redeploy your capital and rebuild your account. As we already mentioned, with NIO's price so low now, it will probably be difficult to match its growth going forward in this economic environment. Of course, it could drop further, but the downside is much more limited than it was a short time ago, and there are more short-term and long-term tailwinds than headwinds.
For those that entered near the top of the 52-week high, it will take a while for them to reach that level once again. That's important to understand because shareholders might be tempted to sell given the wild swings in NIO's share price lately, especially when it crashes. The point is that it's usually a temporary anomaly that fixes itself.
However, you can always take some profit back and re-enter at a better price, or at least sell a portion of your shards to lock in profits.
Just keep in mind that there have to be a lot of NIO bag holders, and when the stock starts to rise steadily, they will sell to recoup some of their losses. That top will stay in place until bag holders have exhausted their selling spree.
Technical analysis
Falls are the main scenario after breaking the key support of the last two years. After breaking another secondary support marked by a zone of highs from July 2020. The next level is the highs reached in its 2018 IPO, at $13.8.
Conclusion
Although NIO is among the favorites to take off when we see a better market situation, the fact is that the context still shows no signs that we have bottomed out.
Regarding its competitors, it is that many investors do not correctly classify their vehicles and their price levels in comparison with the market segment in which their competitors operate.
The good news is that, over the next two years, NIO should compete in most segments of the EV market, and with its production ramping up through the rest of 2022, the number of deliveries should increase significantly. It may be another quarter before that happens, but when it does, it will be goodbye to the low price entry point that we are seeing now.
Nothing has changed with the EV market, and nothing has changed with NIO. It has the potential, because it is oversold, to recover more than its competitors as its deliveries pick up and it expands its target market.
Could NIO fall further? Absolutely, considering the fear that is causing capital to shift from high-growth tech stocks to safer investment vehicles.
But this is only a temporary problem in the electric vehicle market in general, and in NIO in particular. For the patient investor, it will generate some solid returns over time, if they don't freak out and leave the market.
Darío García, EFA
XTB Spain
