NIO To Headwinds: Is That All You Got? (NYSE:NIO)

After a couple of negative new releases over the weekend, NIO (NYSE:NIO) looked to be headed toward a potential bloodbath in Monday morning trading. While I was looking for a drop of about $3.00 per share or more, it managed to hold better than that on Monday, April 11, ending the day down $0.30, or 1.5 percent.

The reason for the decline in share price was the announcements over the weekend that the company would be boosting prices on some of its models, and more concerning, it was suspending production as a result of supply chain issues connected to the Covid outbreak.

In this article, I want to explore the reasons why NIO appears to have found a bottom, and why it is holding up so well. But before that, I want to examine the psychology of trading NIO under current market conditions.

The psychology of trading NIO

There are a few ways to look at the psychology of trading NIO, which is dependent upon whether or not you’re a current shareholder, and if you are, what your cost basis is.

Not only is it a psychological issue, but it also has a significant impact on how to play the stock going forward.

The first thing to consider with NIO is the macroeconomic conditions it is currently operating in. For example, it is not facing the same headwinds U.S. companies are facing because of the upcoming tightening of the Federal Reserve, along with the boost in interest rates expected throughout 2022. That’s because, so far, China hasn’t raised interest rates, but rather, is cutting them.

On the other hand, China operates with zero tolerance for Covid, so when it appears in any meaningful numbers, it will shut down the cities and/or regions it is spreading in.

There is also the issue of the war between Russia and Ukraine, with fears it could spread to other countries if it gets out of hand.

It also hasn’t helped that the usual bears are coming out and pounding the table on an upcoming recession. Even if that’s how it plays out next year, the historical fact is markets and quality companies always rebound after a recession, and move on to significant growth.

The consequences of the responses of China to Covid, specifically supply chain issues, has forced NIO’s hand in suspending production and raising prices. The timing is unfortunate because the company had been poised to ramp up production after increasing capacity in the recent months; especially with the release of its new models in 2022.

As for mindset or psychology related to these events out of the control of NIO’s management, investors need to take into account the fact all of this is a delay, not a permanent situation. With that in mind, shareholders can be at ease concerning the viability of NIO and its business model. In that regard, nothing has changed.

That’s important because if we were to lose confidence in NIO, it could easily result in selling off shares at the time when we should at least be holding, and if we have some dry powder on hand, adding to our positions. This is not a time to fear.

The key here is to ask ourselves what it was that compelled us to take a position in NIO in the first place. Has that reason changed? Has something happened in the EV market that points to something changing in relationship to long-term demand?

If the only reason there is fear is because of the volatility of its share price, that’s not a good reason to panic, but rather, a good reason to add shares and lower our cost basis.

Unless you’re day trading or swing trading NIO, there is really no reason to be concerned over the share price action. Over the long haul, the company is going to do very well. And once chips are more available and geopolitical issues become clearer, NIO is ready to soar. It’s a matter of when, not if.

For those of you in at a hefty cost basis, it will take longer to climb back into the positive, but there is no doubt the company will. The good news in my view is there is a lot of pent-up growth inherent in the company, and when things align together, I see it not only soaring over the long term, but getting a significant tailwind that will drive it higher faster than most people think at this time.

Personally, I’m in at a good, but not great price. I’ve been slowly adding to my position when the share price drops, and will continue to do so within the parameters of my allowable position sizing.

The company is holding up well

I was somewhat impressed with how the share price of NIO held up on April 11. It suggests to me that the company, with the knowledge we have today, had found a bottom. Other things could happen to disrupt that thesis, but as the company stands today, it appears the negative news has been fully priced in.

I’m mentioning this because when I was researching over the weekend, many chat rooms and social media outlets had people asserting NIO was going to get slaughtered on April 11. It did take a hit in pre-market, but after it opened, it gradually gained strength, and finished only a little below Friday’s close.

The reason I see for this is because shareholders and investors are confident in the business model of NIO and the management team in place.

There is of course the fact there were bottom feeders ready to grab shares near the opening of the market, and once that dried up, there was nowhere to go but up. In other words, investors were looking at around $18.00 per share as a solid entry point; they were right.

With several new models set to be released in 2022, and expansion into Europe, there is nothing but growth ahead for NIO over the next several years, and once the headwinds recede, shareholders know they are going to be rewarded if they remain patient.

I think the major reason the company remains resilient is because investors are fully aware of the current challenges NIO and its peers are facing, and all of them are only temporary, and quite probably, of short duration.

The company recently announced it would be increasing the price of its Models ES8, ES6 and EC6 by $1,570, while keeping the price of its ET7 and ET5 sedans the same. I don’t think this was a huge factor in negative sentiment, even though the company had stated not too long ago that it wasn’t going to raise prices.

In the quarters ahead, it’ll be important to see if these price raises will have any impact on sales. Even though supply chain issues are likely to be solved in the not-too-distant future, the raw material costs are likely to remain higher for a prolonged period of time.

The good news there is its major competitors are all raising prices as well, so that won’t put NIO at a competitive disadvantage.

Also important is the strong balance sheet of NIO, which as of the end of 2021, had cash and cash equivalents for the quarter, including restricted cash and short-term investments, of $8.7 billion. That buys the company more than enough time to work through the existing headwinds.

Conclusion

Most of NIO’s perceived problems started when it decided to boost production, which temporarily slowed down growth. Near the end of that period of time, we of course had Covid, decline in supply of chips, concerns over increasing costs of inputs, talk of a recession, and the uncertainty as to how the war between Russia and Ukraine will play out.

When all is said and done, the reality is NIO has held up much better than I thought it would, and that speaks to the strong probability that it is going to enjoy long-term growth in the years ahead.

What has happened is the time frame associated with shareholder and investors expectations has been pushed further out into the future, and that has resulted in sell-offs and increasing negative sentiment for the company, even though the EV market will enjoy strong demand for a long time.

Most significant to me is that NIO has positioned itself for a period of accelerating growth with its production facilities in place and its new models that will be released in 2022.

However long it takes for fundamentals of the market and the company to take center stage again is an unknown, but when they do, this company is going to prove once again it’s one of the major players in the EV markets. Patient shareholders will reap the benefits of that outcome.