How to Play NIO's Upcoming Earnings Report
I rarely talk about electric vehicle stocks, but I want to talk about a popular Chinese competitor to Tesla...NIO, which reports its quarterly earnings this Thursday.
NIO Limited designs, manufactures, and sells electric SUVs in China. According to Barron's, it could soon sell its vehicles in the US too before long. Like Tesla, NIO also makes its own battery packs and other EV components, and is working on self-driving technology.
NIO has $2.5 billion in sales last year. It's on track to generate more than $5 billion in sales this year, according to Wall Street analysts. More on NIO's fundamentals in a minute.
In terms of potential risks and rewards...there are other stocks I like better. If you want to check those out, go over to my Patreon page and subscribe to my newsletter where I recommend stocks that I think are at the beginning of huge moves - not after they've already made a huge move like NIO has over the past year.
But cutting to the chase here, I like NIO's stock chart if we have some patience, knowing that the company is set to report its quarterly numbers this Thursday.
Like I said..."if we have some patience."
Over the past year, NIO's share price rose by 20-fold. So the odds are very low that - at this point, so soon after a gigantic run-up - that the stock is going to double your money in a few weeks or a few months, or even necessarily in the next few years.
It's more common (in my observation) for stocks like this to settle into an extended trading range before attempting to make a successful move back to a higher altitude.
But that said - with a couple of big "ifs" fulfilled - I think the stock could be back up to the old highs by this fall, and rise by 50% by the end of this year. I'll get to those ifs in just a moment...
As I said, I like the look of NIO's chart here. It came down off its highs in the mid-$60s, fell roughly 50% t0 $35...and the stock has now tested that support level 3 times in the last 6 weeks.
So if I wanted to get myself in line for this week's earnings report, on the presumption that the stock could be bottoming here...I'd buy the stock at the current price.
But we always have to face the possibility that we're wrong.
Maybe the stock heads lower the day after we buy it, for some reason that's not apparent right now...and it keeps heading lower. We never know how these things turn out except in the rear-view mirror.
So here's what I would do, and how I trade in my own portfolio...
I would buy only buy enough shares so that I can keep my loss small...if the stock at any point moves below the $33.50 level. That's where I would take the loss and sell.
$33.50 is a key support level because it's been tested a twice in recent weeks - and passed the test each time. So if the stock for any reason moves below...it means that a lot of previously enthusiastic buyers...are getting somewhat weak in the knees and bailing out of the stock.
What do I mean when I say "keep my loss small"? To me a small loss is a loss of no more than 1% of my total portfolio value.
So I'd buy NIO at $42. I'd sell if it fell to $33.50. The difference is $9.50. If I have a portfolio of $10,000, then 1% of that figure is $100. If I divide that number by $9.5...it means I can buy 10 shares.
I've defined my risk, more or less. I know approximately how much my loss will be if I'm wrong...1% of my $10,000. On the other hand, if NIO has already bottomed and continues to run higher...I could be in this stock for a long time and make lots of money, relative to the size of my bet.
Keep your losses small, let your winners run.
Now, as I mentioned before, in my opinion, for NIO to move higher means a couple of IFs need to be fulfilled.
IF the Nasdaq can maintain its current altitude or move higher...NIO's stock will continue to do well. If tech stocks break down for other reasons - and let's face it, these stocks are all very highly valued relative to what they earn in per-share profits - then the selloff in tech stocks will certainly drag NIO's stock lower as well.
IF NIO can deliver on the high expectations set by Wall Street analysts, the stock will continue to do well. We will know soon enough where the company is on that score, since NIO is set to report its quarterly numbers on April 29, later this week.
Stocks live and die by whether they hit their earnings and sales forecasts on a more-or-less consistent basis.
Companies usually forecast what they think they will make in an upcoming quarter. Analysts often take those numbers, and try to refine it with additional data.
For sales, analysts expect NIO to report a little over $1 billion. One of the reasons why this stock has caught the attention of so many investors is that it continues to rack up large sales gains almost every quarter. As recently as 2019, NIO was generating around $250 million in sales each period. So to go from that number to more than $1 billion per quarter is quite feat.
NIO has no earnings per share. It is not generating profits. But I have to admit it's been impressive in how quickly it is erasing its per-share losses, and could - could - get to profitability within the next year or so.
Here's an example...
As you can see from the red-circled numbers at the bottom, yes NIO continues to lose money.
But notice the trend?
Each year it loses LESS money than the year before. NIO's projected to lose only half as much money (-$2.25/share) for 2021 compared to a loss of (-$4.42/share) in 2019.
As far as it goes, that's a good thing. Lots of companies aren't profitable. But a stock can do quite well over a long period of time if it can demonstrate a path to profitability.
So that's yet another reason why NIO may be worth a second look here.
Notice the FY 2022 column on the far right? It doesn't contain any quarterly estimates (that's why the hash marks are there), but based on the company's growth, at least some analysts think the company could perhaps - perhaps - generate a profit of $0.13 a share for 2022.
NIO may not actually fulfill that promise. Lots of things have to go right - the economy has to stay strong, costs for labor and materials can't get too far out of line, and NIO needs to keep building SUVs that can compete against the likes of Tesla.
If anything goes wrong, it could easily knock down the price.
But that's the risk of buying and owning a stock. We always have to consider risk and reward with every new purchase, and judge accordingly.