Sellers Round the Wagons Ahead of NIO (NIO) Report

NIO Limited (NIO) faces a reality check after Tuesday's closing bell, posting third quarter 2020 earnings following a 240% rocket ride set into motion after the Chinese electric vehicle (EV) manufacturer raised revenue guidance in August. The company is now expected to report a loss of $1.14 per share on $4.28 billion in revenue, underpinned by the delivery of between 11,000 and 11,500 vehicles. If met, that will mark an increase of about 135% compared to the same quarter in 2019.

Key Takeaways

  • NIO stock has rallied more than 240% since August's second quarter earnings report.
  • Analysts expect strong delivery numbers in Tuesday's third quarter report.
  • The company is still expected to post a loss in the quarter.
  • The rally has now exceeded all Wall Street price targets.

A wave of post-earnings upgrades set the stock on fire, overcoming a large August secondary offering. Monthly delivery numbers since that time have hit the mark, attracting a steady supply of momentum buyers. However, the rally turned tail last week, dropping 25% after Citron Research turned negative, citing Tesla, Inc.'s (TSLA) more attractive pricing as well as unfavorably low short interest. It may take exceptionally strong guidance to overcome that downdraft.

Wall Street now rates NIO as a "Strong Buy" based upon six "Buy" and two "Hold" recommendations. No analysts are recommending that shareholders move to the sidelines, despite outsized share gains. Price targets currently range from a low of $16 to a Street-high $47, while the stock is set to open Monday's session just $2 below the high target. This lofty placement raises legitimate doubts about valuation, but a strong report is likely to prompt higher targets.

JPMorgan analyst Nick Lai set high expectations for the quarter, upgrading NIO stock from "Neutral" to "Overweight," stating, "We expect solid backlog orders of the newly launched EC6 crossover or around eight weeks wait time. GPM should top ~12% from 8% in 2Q20." He also expects the company to "dominate ~30% of the premium passenger EV market or reach 334k units by 2025," while "valuation on 3x 2025E EV/sales suggests meaningful upside in the long term."

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

NIO Daily Chart (2018 – 2020)

Chart showing the share price performance of NIO Limited (NIO)

The Shanghai-based manufacturer came public on U.S. exchanges at $6.00 in September 2018 and topped out at $13.80 just two sessions later. That marked the highest high for the next 22 months, ahead of a persistent downtrend that continued into October 2019's all-time low at $1.19. A modest uptick stalled below the IPO opening print in January 2020, giving way to a downdraft that posted a higher low during the selloff into March.

The stock returned to the first quarter high in June and broke out, entering a strong trend advance that reached the 2018 high in July. It mounted that level quickly, tested new support for about six weeks, and took off in a second wave that carved a bearish high volume reversal on Friday. The stock is trading lower than Friday's close in Monday's pre-market, exposing NIO to additional selling pressure ahead of Tuesday's confessional.

The 50-day exponential moving average (EMA) has lifted into the upper $20s, about 14 points below Monday's opening tick, marking a logical target if a sell-the-news reaction sets into motion after the report. Longer-term Fibonacci levels don't align well, so we're forced to rely solely on the vertical wave that began at $25.46 on Oct. 26. Friday's selloff found support at the .382 retracement in this view, with the moving average coming into alignment with the .786 retracement in the next few weeks. 

A speculator utilizes strategies and typically a shorter time frame in an attempt to outperform traditional longer-term investors. Speculators take on risk, especially with respect to anticipating future price movements, in the hope of making gains that are large enough to offset the risk.

The Bottom Line

NIO stock reversed on high volume after posting an all-time high last week, indicating that short-term speculators are stepping aside ahead of Tuesday's third quarter 2020 report.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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