Is The Nio Sell-Off Overdone?

Nio NIO shares have been soundly thrashed in the tech sell-off, and the quarterly report released earlier this week did little to assuage sentiment. The stock is now in bear market territory, having pulled back 35.7 % from the Feb. 10 high of $64.60.

Is the sell-off in the shares justified? Did fundamentals flash the red light to investors, who were thronging to the stock in droves ahead of the current downturn?

The 2020 Highs: The COVID-19 pandemic, which broke out at the end of 2019 and ravaged the global economies for much of 2020, proved a blessing for some companies that benefited from the adversity.

See also: How to Buy Nio Stock

Nio, a luxury EV maker, should have taken a big hit in the year, as cash-strapped users preferred to hold back on big-ticket buys. The company did have its momentum of despair in the first two months of 2020. Not bogged down by the adverse geopolitical milieu, the EV startup chose to be proactive instead. The company announced several innovative product and service offerings.

Deliveries continued to climb through the year, with Nio's charismatic CEO William Bin attributing the strength to the growing recognition of its premium brand, the competitive and compelling products and services, the expanding sales network, and most importantly, the support from its passionate and loyal user community.

For 2020, Nio delivered 43,728 vehicles, an increase of 111% year-over-year.

The company also managed to rein in costs, giving margins a lift. It also succeeded in mobilizing finances through a combination of equity, debt and strategic investments, removing a key existential risk it faced in 2019.

Promptly the stock began discounting the fundamental improvement and closed out 2020 with a gain in excess of 1,100%. The strong rally stretched valuation to levels, with some skeptics beginning to question the irrational exuberance in the stock.

Related Link: 8 Takeaways From Nio's Earnings Call: Overseas Expansion, EV Brand Positioning, Margins, R&D And More

Fundamentals, Stock Pause At Start of 2021: Nio had a strong start to the year, as it continued to clock record monthly deliveries in January. The stock raced to a record high of $66.99 on Jan. 11, as it reacted to the announcements the company made at the annual Nio Day held on Jan. 10.

Thereafter, it has been a bumpy ride for the stock. Since the start of February, the stock has been caught in the vortex of the tech sell-off. Incidentally, market leader and EV pioneer Tesla, Inc. TSLA was not spared either. Since the all-time split-adjusted high of $900.40 hit in late January, Tesla shares have given back over 30%.

Nio investors were pinning their hopes on a stellar fourth-quarter report to lift the stock from the depressed levels. It was not to be. The stock continued to bleed despite the EV maker reporting $1 billion revenues for the quarter and seeing an expansion in gross margins.

Naysayers were quick to highlight the wider-than-expected loss and the month-over-month drop in deliveries.

As outlined by Deutsche Bank Securities analyst Edison Yu, the underperformance on the bottom line had to do with forex losses, engendered by a weaker dollar.

Although initially Nio did not explain away the February softness, it later clarified in a blog post the weeklong Lunar New Year holiday that fell in the month played spoilsport.

"The majority of the employees receive seven days off work as a public holiday to spend time with their families, though the celebrations can last for more than two weeks nationwide. Most of the factories were shut down for weeks, and many products that rely on shipping and manufacturing might have been delayed," Nio said in the post.

Is Recovery In The Cards: The company has several catalysts ahead, including the launch of its first sedan, named ET7, and its plan to expand into Europe this year. The company is also making solid progress with respect to its advanced driver-assisted system, battery technology and battery swapping stations.

With the increasing uptake of its battery-as-a-service offering and its recently announced autonomous driving-as-a-service, the company has laid the groundwork for recurrent revenue streams.

This apart, the attractive market opportunity presented by the burgeoning EV market, both domestically and globally, will prove salubrious for the company. There is no denying the fact that EV manufacturing is turning out to be a crowded field. However, early entrants such as Nio are at an advantage, given their experiences in grinding it out in the early stages.

Patient investors, who are willing to ride out the trying times, could be in for rich rewards when things settle down.

Nio shares closed down 5.5% at $39.28, with the stock dropping below the $40 handle for the first time since mid-December.

We briefly discussed support levels for NIO on Friday's Get Technical: