Nio Seems Awfully Risky When Considering the Bigger Picture

Perhaps one of my most glaring criticisms from an editing standpoint is that I write long introductory paragraphs. So, for those who have suffered from my loquaciousness, here’s perhaps my shortest lede ever. It may be time to rethink Nio (NYSE:NIO), and therefore to sell NIO stock.

Before I get into it, let’s discuss some clarifying points. First, this is an article regarding my opinion as to where I think NIO stock will go. I could be dead wrong about this.

Second, InvestorPlace offers a hub for independent writers – and I am one of many –  to publish their opinions, which often vary wildly. Some of my peers on this site remain bullish on Nio stock.

Finally, if you are bullish on Nio stock at this moment and you only want to hear opinions that align with your perspective, then honestly it doesn’t make sense to read this article any further. As well, this is not an exegesis on NIO stock and may miss certain arguments that support the countering opinion.

But if you want to read a non-exegetical cautionary perspective about the Chinese electric vehicle manufacturer, then you’ve come to the right place.

NIO Stock Has a Consumer-Level Valuation Problem

One of the main criticisms that has popped up as NIO stock soared to record-breaking heights is the idea of valuation. Based on its financial performance, the EV maker does seem stretched. The company is burning cash while competing in a cutthroat – and I would argue whimsical – sector.

Sure, you can make the argument that Nio is an aspirational company and that its specific aspirations – providing an alternative to high-end EV brands – make the present valuation metrics worthwhile. And that will be true, if the company delivers on said aspirations. But that’s a big if.

Most importantly in my view, NIO stock may have a consumer-level valuation problem. For instance, the underlying company’s ES8, a full-size seven-seater SUV, has excellent performance metrics, taking this massive behemoth on wheels from standstill to 60 miles per hour in 4.4 seconds. And it has a price tag of roughly $68,000.

Meanwhile, the Tesla (NASDAQ:TSLA) Model X has the same acceleration in standard trim and with an option to seat up to seven passengers. Yes, it costs $80,000, which is to Nio’s advantage. However, when you’re talking about cars priced above $50,000, consumers probably care less about saving money and more about tangible and intangible attributes, such as reliability, access to service and social cachet.

Having really spearheaded the EV movement, I believe more consumers will pass on the discount and go with Tesla, if given the choice. Also, Nio will likely need to give much more of a discount as automotive heavyweights enter the EV scene. That will cut into already negative margins, which may hurt NIO stock.

Speculation Needs Unwinding

On Feb. 17 of this year, I provided a technical reason why NIO stock may be due for a correction. If you look at the price then and where it is today, you can see that I was right to offer a warning.

Currently, though, Nio is in the middle of what I believe is a dead-cat bounce. Thus, the percentage gains appear impressive. Nevertheless, the stock needs to do much more before it can unwind the technical damage on its chart.

However, I’m skeptical that the bulls can continue propping up NIO stock. Actually, this isn’t a criticism of the underlying company, but rather a reflection of the present speculative landscape.

As you know, millions of people have bid up what my colleague Will Ashworth might call crap stocks. Which is all fine and well until you realize that money is a finite resource. Therefore, the more meme stocks are available to trade on, the more they are detracting away from each individual trade.

Further, having gone up so much, NIO stock needs exponentially more funds to produce the rip-roaring gains that initially attracted speculators. In this case, I highly recommend you study the concept of the law of diminishing returns.

I’ve got to assume that with the crisis that came upon us last year, many retail investors are simply tapped out. Indeed, FINRA provides evidence of this based on stock trading on margin hitting all-time highs.

If investors weren’t tapped out, why would they expose themselves to greater risk by trading on margin?

Beyond that, if brokerages get nervous about their borrowers’ solvency, they can impose margin calls – keep a healthy ratio on the margin account or the brokerage will take back those borrowed shares and sell them.

Time to Get Real

If you still believe that NIO stock is going to go off to the races, hats off to you. In my view, investors need to get real with what’s happening. There’s simply too much speculation for rational folks to feel comfortable about hyped-up growth firms attempting to deny gravity.

On the date of publication, Josh Enomoto held a short position on TSLA.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.