Among electric vehicle stocks, Nio (NYSE:NIO) is one that makes big moves, on news both directly and indirectly tied to the China-based EV maker’s potential prospects. A prime example of this is with the reason behind the latest spike in price for NIO stock.
Already trending since the start of the month, NIO stock made a double-digit bolt higher on July 24. If you just saw the stock chart, and had seen no headlines, you would assume that the EV maker had released some promising fiscal results/delivery numbers.
However, that wasn’t what drove its most recent rally. Rather, it was on news that, while positive for the company’s efforts to become a leading brand in its home market, likely won’t have an impact in time to prevent big investor disappointment that is likely to arrive later this year. Let’s dive in, and see why.
NIO Stock and its Latest Rally
So, what was it that sent Nio stock up by nearly 11% on July 24?
As InvestorPlace’s Eddie Pan reported, a key driver was news from China’s National Development and Reform Commission regarding its plans to provide support to private investments in various sectors of the Chinese economy.
According to Pan, this announcement bodes well for the EV maker’s efforts to build out its battery swap station network. One way this EV contender is trying to set itself apart from the competition is by offering customers the ability to swap out batteries in their Nio vehicles.
The ability to swap instead of having to recharge batteries has its advantages. It’s a workaround for the limited range issue, one of the main pain points with EVs.
Swappable batteries also enable Nio to offer its vehicles at a lower price. In short, it’s not illogical for investors to view both developments as positives.
The issue, however, is whether they are overreacting to these headlines. Taking a look at other factors, this is arguably the case.
Not Enough Time to Prevent Lackluster Results
It’s safe to say I am a skeptic of NIO stock. I’m skeptical that Nio is another Tesla (NASDAQ:TSLA). I also believe that this fledgling EV firm has questionable chances of becoming a big player in its home market, much less globally. That said, Mr. Market is taking a much different stance.
Although the stock trades well below the lofty price levels hit during the 2021 “EV stock bubble,” investors have again been bidding it up. The prevailing view is that a much-anticipated re-acceleration of revenue growth will occur later this year.
However, my take could soon finally be vindicated.
The company may ramp up production/introducing new vehicle models, but competition is rising.
As I have argued before, in order to increase demand in tandem with its increased output, Nio may need to aggressively slash prices, leading to higher-than-expected losses.
The above developments could eventually strengthen the appeal of Nio’s swappable battery feature, helping to boost demand without hurting margins.
However, this will probably not happen in time to prevent lackluster results in the near-term. Disappointment with results during this quarter and the next could shift sentiment for NIO back to bearish.
Bottom Line: Sell Into Strength/Avoid
While maintaining a downbeat view on NIO, I’ll admit that my bear case is not ironclad. Even as I believe that factors that could work in the company’s favor, like its battery swap efforts, will only start to pay off down the road.
Recent reports point to Chinese EV sales growth staying strong, despite China’s sluggish post-Covid recovery, and this year’s reductions to purchase subsidies provided by the Chinese government.
Delivery data for the current month could also suggest that the growth re-acceleration is emerging.
Yet while Nio could prove skeptics such as myself wrong in the coming months, much of the upside from this happening may already be factored into its stock price. Downside risk may be high, if Nio skeptics are proven correct.
With this, if you currently own NIO stock, take advantage of the battery swap rally, and sell into strength. Otherwise, avoid.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.