All eyes in the electric vehicle (EV) space are glued on Tesla (NASDAQ:TSLA). At times, that has worked incredibly well for companies like Nio (NASDAQ:NIO), a smaller China-based EV producer. However, when Tesla comes under pressure, that can have an adverse impact on Nio stock.
Tesla has exploded in market capitalization over the past few months. That has taken names like Nio higher as well. In fact, it’s even given momentum to names like Workhorse (NASDAQ:WKHS) and Nikola (NASDAQ:NKLA), although both have been very volatile.
The fear now is that, after topping a market cap of $450 billion, Tesla stock has begun to waver. If it falls, will it take Nio stock down with it?
It very well may. Tesla is a dominant force in what is really a small industry if we exclude traditional automakers. However, Nio is a bit more unique. It has strong growth in China and continues to deliver solid results each quarter. It has momentum and like Tesla, it’s unique (even though both companies operate in China).
Breaking Down Nio
At several points since going public in September 2018, Nio stock has struggled. Production and deliveries did not live up to expectations and the financials had investors leery.
Simply put, it’s expensive and difficult to get a new auto company up and running, and then sustain those operations. Making vehicles has a lot of overhead and fixed costs. As such, the margins tend to be poor and it makes execution a key component to success.
While Nio was struggling though, it got much better with execution. Add to it the firm’s ability to raise capital and Nio stock has gotten much more attractive. Nio raised cash via investments in China and more recently priced 88.5 million shares at $17 apiece. That alone raised about $1.5 billion.
Despite disruptions from the novel coronavirus, Nio has been on roll.
In July, the company sold 3,533 vehicles, up more than 300% year-over-year. Earlier this month, Nio reported that deliveries more than doubled year-over-year for the month of August.
Overall for the second quarter, deliveries climbed over 190% year-over-year, while revenue jumped almost 150%. More importantly, margins finally gave investors a spark of hope. Gross margin and vehicle margin came in at 8.4% and 9.7%, respectively. That was far better than last year’s Q2 result of -33.4% and -24.1%, respectively.
Nio also generated its “lowest-ever operating losses and more importantly, a positive cash flow from operations for the first time in our history.”
For next quarter, management expects deliveries to grow about 130% to 140% year-over-year. That will include its brand new vehicle, the EC6, which was launched in late July and is expected to begin deliveries this month.
In a nutshell, Nio has serious multiple momentum levers at work right now.
Trading Nio Stock
Source: Chart courtesy of StockCharts.com
That momentum goes beyond deliveries, the balance sheet and the trajectory in margins. It also extends to the stock charts.
In early July, shares really got hot. Nio stock closed at $7.91 on July 1st and by July 10th, the stock had closed at $14.98. In the almost two months that followed, Nio consolidated its gains.
That consolidation was done in the form of an ascending triangle. That’s where uptrend support (blue line) and in this case, the 20-day moving average, squeezed shares higher against a static level of resistance. Once shares broke out over $15.50 resistance, this level turned to support on the most recent selloff. That’s another win for the bulls.
Now this is where things get a little tricker.
So far, Nio stock has put in a double-top at $21. The pullback to the 20-day moving average continues to hold as support, but this stock has had one heck of a run. Until the bulls lose their footing, it’s hard to get too bearish.
Right now we have an inside week, as last week’s range is within the prior week’s range. If Nio stock can rotate over last week’s high (at $18.72) then it opens the door to a rally up to $21. Above that puts the 161.8% extension for the entire two-year trading range on the table at $21.59.
A move above that technically puts the two-times range extension in play at $26.41.
On the downside, a rotation below last week’s low (at $16.51) and the 20-day moving average, could put a larger decline in play. Specifically, it could put a retest of the 50-day moving average in play, followed by a test of the prior all-time high down at $13.80.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.