The electric vehicle industry has been on fire in 2020, and companies around the world that specialize in coming out with EVs and EV-related technology have seen their stocks fly higher. One of the biggest winners of the year in space is China NIO (NYSE: NIO), with its share price soaring to 970% so far this year on December 4.
However, NIO’s earnings to date have been much higher recently. In fact, last week alone, NIO stock closed with earnings of 1,240%. In just five trading sessions, longtime shareholders in NIO have cost a significant portion of their profits by more than 20%.
Many investors are wondering whether this week’s NIO collapse is a momentary blow in the priceless march of EV stock higher or whether it marks a real reversal in the thinking of the company. Below, we take a look at what prompted this week’s move lower and what might come in the future.
There are many eyes on the EV industry
Shares of NIO fell more than 10% on Monday, moving in a lockdown with several other foreign electric vehicle specialists. A well-known short selling research firm is casting aspirations on Chinese EV peers Kandi Technologies (NASDAQ: KNDI), claiming that the company’s reported revenue figures do not reflect actual independent third-party sales but rather only movements between Kandi-related companies. Kandi stock fell 29% that day and the week ended down 41%, but more well-known companies like NIO could not avoid the downdraft.
Another 10% loss hit NIO on Tuesday. Some found it troubling that investors largely ignored good news from NIO’s underlying business, as it more than doubled its monthly deliveries in November year over year to nearly 5,300. NIO’s new EC6 sports cruiser has seen rapid progress since its launch just a few months before, distributing more than 1,500 vehicles.
NIO stock recovered slightly on Wednesday, rising 6% as investors appeared to be reflecting on the company’s favorable sales figures. Moreover, analyst notes the previous day of Goldman Sachs included an upgrade from sell-to-neutral and a nearly seven-fold boost in its price target on NIO to $ 59 per share, and shareholders seemed to get a favorable response if that news was delayed.
And yet by Thursday, a different analyst gave negative views on China’s EV industry, sending NIO’s stock lower 5%. UBS issue a note on an NIO opponent XPeng (NYSE: XPEV), cutting its buy rating to neutral based largely on the huge increase 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) he made a secondary offer on Friday morning that led to a nearly 6% fall in its stock, and investors in Chinese EV stocks once again took that as a reminder of how high share prices have risen in 2020.
Long-term investors should not worry – but short-term traders should
Ultimately, NIO needs to see its business succeed in order to justify the huge rise in its share price. So far, the company has done well on NIO’s three key strategic elements for growth that I noted back in July.
First, freight counting has been increasing. Back in June, NIO delivered approximately 3,700 vehicles, and in just five months, the automaker has managed to increase its transit speed by more than 40%, regularly hitting new record levels along the way.
Secondly, the new EC6 has been well received. Deliveries have steadily increased, with 16 in the small part of September where they were available climbing to 883 in October. November EC6 deliveries were up between 70% and 75% from October levels and numbers were larger than the larger ES8 SUV model.
Finally, NIO has managed to remain prudent with its capital. Mid-November, NIO’s third-quarter financial report noted 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 opportunity to invest in efforts to boost productivity and meet growing demand for its vehicles.
That said, those focused on the short-term need to be prepared for share price volatility. NIO’s gains are justified given its growth, but they have also been large enough that setbacks are inevitable.
Looking down the road
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 is not 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.