The Electric Vehicle space is like a spider web. Endless EV companies are competing but also planning possible acquisitions and M&A. Thus it can be hard to navigate the spider web or even choose a potential winner. However, as time progresses, the future industry captains emerge.
In is safe too say Tesla (NASDAQ: TSLA) is the king of the EV mountain. However, Elon musk might have to make space as companies like Nikola (NASDAQ: NKLA), and Nio Incorporated (NASDAQ: NIO) begin to experience significant investor backing. Today we are discussing why NIO, a Chinese Electric Vehicle maker, is up, how COVID-19 affected them, and whether they are worth the investment?
Why is NIO up 100%?
Speculation currently controls the EV market. Future expectations can be great if the expected outcome is positive. However, speculation can also be the mother of all evil. Because if investors suspect lawsuits and potential bankruptcy files then the stock can fall off a cliff as seen with Luckin Coffee (NASDAQ: LK), Hertz (NASDAQ: HTZ), and Chesapeake (NASDAQ: CHK).
Thankfully for NIO the forecasted future was bullish. It all started on Monday with the Electric-truck maker Nikola. On Monday, the founder and chairman of Nikola have announced that they will start taking reservations for their new electric truck in late June this year. After this announcement, Nikola’s shares rose 100%, creating optimism around the EV sector. The bulls charged over to NIO on Tuesday causing a 15% increase during the day.
However, NIO is not just up because of retail investors speculating. The recent investment by the Hefei government into NIO is grabbing the eyes and wallets of value investors. (opinion not advice). Consequently, many financial institutions raised their target price and buy ratings on the Chinese EV manufacturer. For example, Goldman Sachs analyst Fei Fang raised his target price on NIO to $6.40.
How has COVID affected their business?
Flashback to the beginning of 2020 and NIO was financially unhealthy. The EV maker has burned through more than $6 billion since 2014. To add insult to injury, NIO faced a battery call, which cost the company a significant of money in overhead costs. Also, Nio only sold 8,224 vehicles in the fourth quarter of 2019. The unpleasant sales continued as they only managed to sell 3,838 vehicles in Q1 2020. Causing a loss of $238.9 million in the 1st quarter of 2020.
Then COVID-19 struck NIO and caused its sales to plummet by more than 50%. Investors began to question the financial future of the company.
However, the Hefei government rescued NIO from their financial struggles through an investment of $1 billion. The investment resulted in Hefei government holding 24% stake of the company, leaving 76% to Nio and their shareholders.
Is NIO worth the investment?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Despite the bullish trend we should see a pullback. Considering NIO is down 5% in pre-market activity (at the time of writing) we should see bears at the bell. However, a small selling should not discourage investors from keeping a close eye on NIO.
Long and short term strategy
Because NIO could surge of China’s EV ambitions, the overall market is positively speculated, and the world is heading towards a more sustainable future. Also, we now know that there is a positive correlation between positive Nikola news NIO surges. (opinion not advice) Thus, if investors play their cards right they could snap up a nice gain off positive Nikola news (opinion not advice). Just like the correlation between positive OPEC news and oil stocks.
Downside of EV speculation
However, when NIO surges when others in the industry like Nikola and Tesla do well, you must ask, is the buying logical? The short answer is probably not. Just like how Split it (ASX: SPT) , Openpay (ASX: OPY), and Sezzles (ASX: SZL) all surged when growing BNPL player Zip co blew up 200%. Thus, I would focus on Tesla and Nikola for the time being until enough evidence can validate a long-term investment instead of just speculation.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Jaewon Jung, Associate of YIG