Why NIO Stock Lost 20% of Its Value Last Week

(The Motley Fool)

The electric vehicle industry has been on fire in 2020, and companies across the globe that are specializing in coming out with EVs and EV-related technology have seen their stocks fly higher. One of the biggest winners of the year in the space has been China’s NIO (NYSE:NIO), with its share price having soared 970% so far this year as of Dec. 4.

However, NIO’s year-to-date gains have been much higher recently. In fact, just last week, NIO’s stock closed with a gain of 1,240%. In just five trading sessions, a drop of more than 20% has cost longtime shareholders in NIO a significant portion of their profits.

Many investors wonder if NIO’s drop this week is a momentary blip in the EV stock’s inexorable march higher or if it marks a true reversal in thinking about the company. Below, we’ll look at what prompted this week’s move lower and what the future might bring.

Lots of eyes are on the EV industry
NIO shares fell more than 10% on Monday, moving in lockstep with a number of other foreign electric vehicle specialists. A well-known short selling research company cast aspersions on Chinese EV peer Kandi Technologies (NASDAQ:KNDI), making allegations that the company’s reported revenue figures don’t reflect actual independent third-party sales but rather only movements between companies affiliated with Kandi. Kandi’s stock fell 29% that day and ended the week down 41%, but even better-known companies like NIO couldn’t avoid the downdraft.

Another 10% loss hit NIO on Tuesday. Some found it troublesome that investors largely ignored good news from NIO’s fundamental business, as it more than doubled its monthly deliveries in November year over year to nearly 5,300. NIO’s new EC6 sport crossover has seen a rapid uptick since its launch just a couple months before, delivering more than 1,500 vehicles.

NIO’s stock recovered a bit on Wednesday, rising 6% as investors seemed to reflect on the company’s favorable sales figures. Moreover, an analyst note the previous day from Goldman Sachs included an upgrade from sell to neutral and a nearly sevenfold boost in its price target on NIO to $59 per share, and shareholders seemed to have a favorable if delayed reaction to that news.

Yet by Thursday, a different analyst gave a negative view on China’s EV industry, sending NIO’s stock lower by 5%. UBS issued a note on NIO rival XPeng (NYSE:XPEV), cutting its rating from buy to neutral based largely on the huge run-up in valuation that XPeng had seen. NIO investors seemed to take that message to heart as well.

Finally, on Friday, NIO took another 5% loss. Competitor Li Auto (NASDAQ:LI) did a secondary offering on Friday morning that resulted in a nearly 6% drop in its stock, and again, investors in Chinese EV stocks overall took that as a reminder of just how high share prices have risen in 2020.

Long-term investors shouldn’t worry — but short-term traders should
Ultimately, NIO needs to see its business succeed in order to justify the massive rise in its share price. So far, the company has done well on NIO’s three key strategic elements for growth that I identified back in July.

First, vehicle delivery counts have been on the rise. Back in June, NIO delivered about 3,700 vehicles, and in just five months, the automaker has managed to boost its delivery pace by more than 40%, regularly hitting new record levels along the way.

Second, the new EC6 has gotten a good reception. Deliveries have risen steadily, with 16 in the tiny part of September in which they were available climbing to 883 in October. November’s EC6 deliveries were up between 70% and 75% from October levels and outpaced numbers for the larger ES8 SUV model.

Finally, NIO has managed to stay prudent with its capital. In mid-November, NIO’s third-quarter financial report indicated that the company had built up its cash reserves to more than $2.8 billion. That compares to just $1 billion in debt, and that gives NIO the chance to invest in efforts to boost production and meet rising demand for its vehicles.

All that said, those focused on the short run need to be prepared for share-price volatility. NIO’s gains have been justified given its growth, but they’ve also been big enough that pullbacks are inevitable.

NIO has captured the imagination of many investors in the auto industry, and early investors have been rewarded. Even a big 20% drop in a week isn’t something long-term investors should fear. Shareholders should expect bumps in the road, but it still looks likely that NIO will reach its destination and become a powerful force in China’s EV industry for years to come.

Share: