A pair of recent headlines with Nio (NYSE:NIO) have resulted in a moderately-sized rally for NIO stock. Climbing back to prices nearing $10 per share, some may think now’s the time to add this China-based EV maker back to their portfolios.
Yet despite this latest boost in price, I wouldn’t assume that Nio is next headed to $15, $20, or even more per share.
For one, if you inspect the news items that have sparked renewed bullishness for the stock, it’s clear that these developments are at best small-potatoes.
While the market is overreacting to said developments, it is at the same time continuing to ignore major red flags with the stock that continue to persist.
All of this could create large losses, and even larger frustration, amongst investors, irrespective of whether they bought before, during, or after this recent rally. Here’s why.
Headlines Spark Bullishness for NIO Stock
So, what are the headlines that have bolted Nio shares higher lately? First, on June 20, the EV maker announced a large equity financing deal with an investment firm.
Through a share subscription agreement, CYVN Holdings will buy $738.5 million worth of newly issued shares of NIO stock. CYVN Holdings is hardly a household name, but chances are you are familiar with its majority owner.
That would be the Emirate of Abu Dhabi, a member state of the United Arab Emirates. Oil-rich Abu Dhabi is looking to put some of its $853 billion sovereign wealth fund to work in “post-carbon” investments like electric vehicles.
Besides being a deal similar to the Saudi Government’s continued backing of U.S.-based EV startup Lucid Group (NASDAQ:LCID), there’s another reason investors see this as good news for Nio.
In theory, this investment could help turbo-charge the company’s growth.
The same thing goes with the other latest Nio-related headline. As InvestorPlace’s Chris MacDonald wrote June 29, Nio has entered a partnership with China National Offshore Oil Corporation (CNOOC for short).
This partnership could enable Nio to build out its EV charging/battery swap network much faster than previously anticipated.
Why You Shouldn’t Get Too Excited
I know what you are thinking. Big deals with big investors/companies sounds like the recipe for growth and returns for NIO stock. Yet while the abov developments are big in terms of dollar-size and scale, their ability to improve the prospects of Nio in a big way, both items fall short.
Yes, CYVN’s investment will enable the company to ramp-up production and absorb near-term operating losses. The CNOOC deal may provide Nio a nationwide charging/battery swap network, without it having to lay out all of the required capital investment up front.
However, in the near-term, it doesn’t matter if Nio continues to scale up, while expanding a station network that will make its vehicle (with their unique swappable batteries) a more practical option for Chinese EV buyers. Neither of these will solve the biggest issue at hand today.
It’s important to note that, before the CYVN and CNOOC news, investors overreacted to something else with NIO shares. That would be the possibility of substantially higher sales growth during the last two quarters of 2023.
While much-anticipated, the chances that this fails to come to fruition has continued to climb.
As Risk Still Runs High, Avoid
As Louis Navellier and the InvestorPlace Research Team have argued, far more points to disappointment rather than positive surprises with Nio’s results in the two quarters ahead.
The company may be increasing its output, and releasing new vehicle models, but as seen from sales data so far this year, the competition in China is leaving Nio in the dust. This has resulted in the EV maker finally conceding to industry trends, by implementing vehicle price cuts.
However, given rising competition, not to mention weakening demand, it is questionable whether reduced vehicle prices will enable the company to find demand in line with increased production.
Meanwhile, lower prices are likely to weigh on its vehicle margins. Instead of narrowing its net losses, they could come in higher-than-expected.
As this heavy risk could lead to a massive price decline, ignore the supposed “big news,” and avoid NIO stock.
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.