Nio Stock Is in Bubble Territory But There’s More Room to Run


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One of the pivotal reasons why electric vehicles have soared this year is due to their relative simplicity. Historically, Chinese automobile manufacturers attempted to compete with their Japanese and Korean counterparts, only to be met with failure. The reality is that making quality internal combustion engine cars is difficult. But with EV batteries, most of that complexity is sidestepped, bolstering the fundamentals case for Nio (NYSE:NIO) stock.

a sports car made by Nio

Source: Carrie Fereday / Shutterstock.com

Essentially, EVs have fewer moving parts than combustion cars. By removing that component and replacing it with a lithium-ion battery pack, the heart of the EV becomes commoditized. However, that also removes most of the character of a car. Although I can’t say for certain, I’d bet that’s why Ferrari (NYSE:RACE) doesn’t want to build an EV. For the iconic exotic car company, character is one of the reasons why it’s in the business.

But Nio doesn’t care about that. Instead, it’s about making green — and if helps keep our planet green, so be it. More importantly, by having the most difficult aspect of building a car commoditized, the company can instead focus on design. And boy, does it make some very attractive cars. Undoubtedly, this played into the enthusiasm for Nio stock.

However, with shares up almost 655% on a year-to-date basis, it’s fair to wonder if Nio stock is in bubble territory. On the surface, there’s nothing to worry about. According to a BusinessInsider.com report, JPMorgan upgraded the shares to overweight, forecasting a $40 price target.

Not to be outdone, Citigroup analyst Jeff Chung upgraded Nio stock to an equivalent of buy from hold, assigning a price target of $33.20 from $18.10.

Both analysts see a dramatic rise in China’s EV market, which on the surface makes sense. Throughout the world, interest in EVs has soared. As well, charging infrastructure is being built out, making the transition much more accessible. Still, you’ve got to wonder if things are getting a little bit out of hand.

Nio Stock Looks Like a Bubble

When I saw the sharp rise in NIO, I felt that the price action looked familiar. Sure enough, the price action resembles that of another company that I follow closely, Sony (NYSE:SNE).

But for this exercise, we’ll need to go back in time to 1999, specifically from May 19 to Oct. 12. During this period, SNE soared from $38 to over $66, which was fairly remarkable considering that shares were already booming since the early 1990s.

Interestingly, between May 22 to Oct. 15 of this year, NIO enjoyed a much more extraordinary rise, jumping from $3.27 to $28.07. But the main takeaway is that when you stack these two trends together, they share an extremely strong 93.4% correlation coefficient. In fact, when you stack the two trends together, they almost look identical.

In the near term, that bodes very well for NIO stock. You have to remember that flying to $66 was just the start for SNE. It would go on to hit $140 before falling back down to earth.

But why couldn’t Sony keep up the momentum? Here’s the BBC’s analysis on the issue:

Wall Street valued Sony incorrectly for the same reason that Sony continued to misunderstand its own value: In 2000, Wall Street and Sony both believed that Sony was a device maker and that ever-improving devices would rule the world.

The truth has turned out to be more powerful than that. Devices are merely servants, connected to the broadband networks that more than three-quarters of U.S. homes have, or wirelessly connected to the home networks or coffee shop hotspots that have doubled in use since tablets came around.

But even this fact was misread by people at Sony. Sir Howard Stringer himself boasted on stage at the CES 2009 electronics event that 90% of Sony devices would connect wirelessly by 2011.

That still misses the point. A platform world teaches us this truth: it’s not the device that matters, it’s not even the connected device that matters. It’s the connected experience that matters.

Then, this little fruit company called Apple (NASDAQ:AAPL) came along and changed everything.