NIO (NYSE: NIO) Appears to Be Continuing Its Plunge From Yesterday as a Confluence of Several Factors May Be Fueling the Pullback

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NIO (NYSE:NIO), the Chinese EV manufacturer, appears to be losing its momentum, as evidenced by a general decline in the stock price this week. If the current pre-market levels hold, Thursday’s trading session will likely be equally brutal for NIO bulls.

Since reaching a fresh all-time high of $14.98 on Friday, NIO shares have pulled back 17.42 percent, currently trading at $12.37, as of 09:03 a.m. ET.

NIO Q3 2020 Earnings – Solid Financial Performance During a Record-Breaking Quarter

While there is no material news flow that appears to be driving these stock moves, a number of underlying factors may be partially to blame. Firstly, NIO bulls might be cashing some of their gains after a historic run over the last couple of weeks. As an illustration, since the 22nd of May, NIO shares have registered a cumulative gain of 278 percent relative to the current pre-market level. As we reported previously, this epic surge has naturally stretched NIO’s valuation metrics with respect to its peers. As an illustration, Tesla (NASDAQ:TSLA) is currently trading at a trailing 12-month Price/Sales multiple of 11.0x. NIO, on the other hand, boasts of a trailing 12-month Price/Sales multiple of 15.0x. While noting that the entire EV space has been ramping up lately, NIO’s surge is still an outlier.

Secondly, Tesla’s recent aggressive moves in China may be pressuring NIO shares. For instance, on the 12th of July, Tesla slashed the starting price of its Model Y crossover by $3,000. This follows another broad-based cut in May when the EV giant slashed $5,000 from Model S and X and $2,000 off its Model 3. Furthermore, reports emerged on the 14th of July that Tesla VP, Tao Lin, met officials from a district in the city of Chongqing in southwestern China to deliberate on expediting certain projects. While officials were quick to point out that the ensuing cooperation may be limited to the establishment of sales and maintenance centers rather than the construction of factories, the development does highlight Tesla’s growing roots in the world’s largest EV market. This developing paradigm will obviously place NIO’s offerings in a much more competitive environment.

Nonetheless, domestic brands are expected to maintain their dominance in the Chinese EV market due to a number of factors. A predominant number of New Energy Vehicles (NEV) sold in China retail for less than $45,000. This segment is one where Tesla has only a limited ability to compete right now. However, Tesla is trying to cut the production cost of its built-in-China Model 3 which may, at some point in the future, start undercutting local manufacturers. As startups like NIO and Byton focus on the high-end EV market, they remain much more vulnerable to Tesla’s stratagems.

It remains to be seen how far NIO shares plunge from their all-time highs. Given the fair amount of effervescence in the stock lately, a moderate pullback may prove to be healthy in the long run as it will restore normalcy to NIO’s inflated valuations, setting the stage for a significant up thrust later on. Of course, all eyes will now turn to when NIO discloses its upcoming quarterly earnings.

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