With an almost 80% rally since the middle of May, there’s a strong case to be made for considering a long position in electric vehicle (EV) maker NIO’s (NYSE: NIO) shares. While they were well able to capitalize on the euphoria that swept equity markets before and after the COVID crash, investors have had to watch them give up as much as 80% over the past eighteen months. But with the broader equity indices staging a solid rally themselves, it’s looking more and more likely that this is more than just a dead cat bounce, and possibly the start of something longer lasting.While Tesla (NASDAQ: TSLA) may have first mover advantage and greater economies of scale already locked into its operating model, investors have been keen to find other EV makers that have the potential to be the second, third, fourth etc. biggest EV player after them. Based on recent share performance, it looks like they fancy NIO to be one of these. Compared to Tesla shares, they’ve tacked on more than 60% since their low of last quarter, while Tesla stock has only moved up 17% over the same period.
Consider A Position
There are plenty of industry tailwinds starting to appear as well that should serve as solid foundations for a sustained move higher into the fall. For example, according to recently released data from the China Passenger Car Association, it is expected that retail sales of new energy vehicles (or NEVs) in China will be shown to have surged 102.5% Y/Y to 450,000 units in July. All passenger vehicles in July are expected to be around 1.77M units, up 17.8% Y/Y. This comes on top of the record numbers of NEV sales seen in June and bodes well for the rest of the year.
Specific to NIO, they delivered 10,052 vehicles in July 2022, which was a 26.7% increase year on year. This update came shortly after bullish comments from the team over at Morgan Stanley, who issued a tactical call on NIO just over a month ago. Analyst Tim Hsiao reiterated his Overweight rating on NIO shares, with his price target of $31 pointing to remaining upside of more than 50% from where shares closed on Thursday. In a note to clients Hsiao wrote “while sluggish industry sentiment resulted in the sell-off, we believe NIO’s upbeat June sales together with good volume trajectory into 2H, aided by a strong product pipeline, will revive investor confidence in the company’s operations and trigger a rebound in the stock”. Looking at the stock’s chart since his update, we can say so far so good.
Managing Risk
For the rest of the year, it has to be said that there are some headwinds that remain. The COVID situation in China remains fluid and EV shares, in general, remain sensitive to rising interest rates. The thinking here on the latter point specifically revolves around the fact that many EV makers are still making losses, and their path to future profitability is built on being able to borrow heavily now to fund their growth. But higher interest rates mean their borrowing gets more expensive, which adds to their short term expenses. While this is a real risk right now, it appears that investors are coming back around to the idea that the longer term potential of industries like EVs outweighs any near-term risk.
From a technical perspective, NIO shares have put in a short term low around the $19 mark and look like they’re ready to turn north again after softening slightly throughout July. Taking out the double top that’s formed at $24 will be the first target for them, and beyond that investors can start thinking about the mid-$30s. Fears of a global recession are still floating around, so downside risk will have to be managed. A firm break below $19 might spook any recent investors and could be a good place to work some stop-losses. Like with many of the high growth stocks out there, buying into NIO now will require conviction in your long term belief and an iron stomach to ride out any near term volatility.
