Shares of Chinese electric-vehicle maker Nio (NYSE:NIO) have been on fire this month, growing roughly 31.8%. Nio stock is up 5% after its dazzling showing at its annual Nio Day event it held earlier this month in Chengdu, China. It unveiled the ET7 at the event, its first smart electric sedan with autonomous driving capabilities. Employing a similar approach to EV giant Tesla (NASDAQ:TSLA), the company’s top-down approach to its product portfolio will continue to pay dividends in the years to come. However, healthy growth in the stock has pushed the stock in the overbought territory.
Nio Day shows that the company can be in the top tier of EV makers, despite having a relatively minuscule share of leader Tesla. It has built up significant brand equity in the domestic market, comparable to the established EV brands. Moreover, its batteries-as-a-service program is one of the most exciting elements of its business models, creating a long-term revenue stream for the company.
Valuation has always been an exciting topic of conversation in the EV sphere. Most EV companies are known for their bloated valuations without having the fundamentals to back it up. Nio has been one of the best performing EV stocks in the past six months.
Source: Chart courtesy of StockRover.com
The chart above shows the dividend-adjusted return for some of the top EV stocks in the market. From the chart, we can see that Nio’s stock price has risen a whopping 381% in the past six months. Tesla has also witnessed exponential growth at roughly 170%. However, it appears to have nothing on the spectacular growth of Nio.
The next chart shows Nio stock’s relative strength index in the past six months. The relative strength index measures the speed and change of price movements. Typically, if it goes beyond 70%, we are looking at an overbought situation. From the chart above, we can see that its RSI is roughly 66%, which is inching closer to that 70% benchmark.
There have been conflicting estimates about Nio stock’s price, ranging from a high of $100 to a measly $7.70. However, the mean analyst estimate for the stock is at $47.70. This means that the stock is trading at a premium of $14.3, considering its current price of roughly $62. With such a massive spread between the high and low estimates, it is clear that there is a lot of volatility associated with the stock at this time. Moreover, with such a high RSI estimate, it appears that the stock will dip in the coming months. Price metrics for the stock are off the charts, even from the standpoint of an EV company.
Shortly after its hugely successful Nio Day, the company announced its double tranche convertible notes priced at $1.3 billion. Seeing the company’s innovative capabilities, Nio Day’s success, and its BAS service, the convertible notes were quickly oversubscribed. The two tranches worth $650 million each are due in 2026 and 2027 and callable a couple of years prior. These notes will convert at $93.06 per ADS, roughly a 50% premium to Nio stock’s current price.
With the massive uptick in its stock price and the success of its new offering, the company will be converting a significant portion of its 2024 notes to ADS as well. Many would argue the need for these infusions, considering Nio has over $3 billion in cash. Moreover, Chinese EV makers are also getting a lot of help from the government. Most recently, the company’s rival EV maker XPeng (NYSE:XPEV) received a $1.98 billion loan from Chinese state-owned banks. With such massive funding, Chinese EV makers have the necessary amount to continue splurging on R&D and developing their competencies further.
Final Word on Nio Stock
Nio stock was a revelation in 2020 and is picking up from where it left off last year. With several exciting developments in the pipeline, investors have gotten delirious about the investment. This is why its convertible notes went oversubscribed and such offerings will continue to attract similar interest for the foreseeable future. However, it appears that the stock is overvalued, and a pull-back appears to be imminent. Therefore, its best to wait for a dip before investing in Nio stock.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article