Deutsche Bank analyst Edison Yu issued positive comments about Nio (NYSE:NIO) on Aug. 9, two days before the electric vehicle (EV) maker reports its second quarter 2021 earnings after the markets close. NIO stock gained 3% on the comments.
I’m in the company’s corner long-term, but in my last two articles about Nio, I’ve been hesitant to call it a flat-out buy. That’s primarily due to its stretched valuation.
Now, with positive analyst comments about Nio circulating on Reddit, its stock must have become awfully tempting to some investors. However, unless you’re an extremely aggressive investor, I think it makes sense to buy NIO stock after earnings, not before. Here’s why.
The First Reason to Wait on NIO Stock
In my latest article about Nio on July 28, I suggested that at 21x sales, risk-averse investors were wise to look at safer bets. One example was Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which owns a chunk of Nio competitor BYD Company (OTCMKTS:BYDDF).
In late June, I suggested that NIO stock — which was up more than 60% over six weeks at the time — might be ready for a cooldown. Since then, it lost 17% of its value from July 1 through its Aug. 9 close. If you bought some shares in late July when the price was below $40, I would salute you.
As for Yu’s comments, he expects Nio to beat Q2 2021 estimates. However, the analyst estimates it will lose 7 cents per share on $1.32 billion in sales this quarter. This is slightly more optimistic that the consensus, which expects $1.28 billion on the top line and an 11 cent loss on the bottom line.
Yu also believes the company’s Q3 2021 deliveries will be 14% higher than the 21,896 vehicles delivered in the second quarter. But according to some investors, the problem is that Nio might not hit its goal of delivering at least 90,000 EVs in 2021.
Assuming Yu is correct and it delivers 25,000 EVs in Q3 2021, that means it will have to deliver at least 23,000 vehicles in the fourth quarter. In Q4 2020, it delivered 17,353 vehicles. This means it will need a 33% year-over-year increase in the fourth quarter to hit 90,000, the bottom end of its guidance for 2021.
We already know how many vehicles were delivered in the second quarter. However, there is still the risk that Yu’s estimates for sales and earnings are overly optimistic. And if it loses more than the 11-cent consensus, shares could certainly move lower on the news.
The Second Reason to Postpone Your Buy
InvestorPlace’s Louis Navellier thinks it’s a slam dunk for Nio stock to perform well in the rest of 2021. A big reason is the company’s plans to start building mid-priced and low-priced EVs under a new brand. As Navellier points out, it will begin production on the first vehicle in the first six months of 2022.
“I’m still bullish on Nio for a few reasons. I think its expansion into the low- and mid-income EV market will grow its customer base dramatically. Additionally, the expansion of its BaaS model will make Nio stand out from the competition,” Navellier concluded on Aug. 9.
I don’t disagree with any of his arguments in the long-term. However, I am concerned about investors’ perception of Nio’s latest deliveries. As my colleague highlighted, while July deliveries were 125% higher than a year ago, they were 1.8% lower than its June deliveries. Additionally, two of its competitors delivered more vehicles in July.
If the same thing happens with its August deliveries, NIO stock could be ready for a smackdown.
The stock has had two major and three minor corrections since the end of November 2020. I wouldn’t be so sure it won’t experience more volatility in the final five months of 2021.
Investors Should Wait to Buy NIO Stock
As much as I like Nio’s future, I would be shocked if investors don’t get another chance to buy its stock in the $30s in the next few weeks.
Who knows? Its price could even drop to that level as soon as this week. While it’s unlikely, losses higher than 11 cents could spark panic amongst the weaker hands.
If you must buy before earnings, I suggest you only acquire half a position and wait for its share price to come to you. I believe it will — but I guess we’ll see.
On the date of publication, Will Ashworth did not have (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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
View more information: https://investorplace.com/2021/08/resist-the-temptation-to-buy-nio-stock-before-earnings/