Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

NIO closed at $34.06 on Friday, failing to close above its 10-Day EMA of $34.42, although the stock climbed as high as $34.78 intra-day. DCF analysis using consensus FCF forecast suggests that currently NIO's shares may be implying a 18.1% perpetuity growth outlook which would be bearish if the yield curve continues to steepen. While fundamental valuation implications do not necessarily become reflected in stock prices over a short period, Friday's technical chart alignment could signal further bearish short term price action.<ul>
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Bearish Technical Alignment on Friday: Dark Cloud Cover was formed on the daily candlestick chart on Friday. While the pattern needs to be confirmed on Monday, it may be a new bearish signal to what looks like an impending death cross that I mentioned in <a href="https://www.smartkarma.com/insights/nio-is-it-re-entry-point-yet" target="_blank" data-smartkarma-citation="insights:51824" rel="noopener">NIO: Is It Re-Entry Point Yet?</a> on May 20.</li>
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DCF Analysis Reality Check: At current share price, 3-year consensus FCF forecast and 1Q21 balance sheet details suggest that the market may be implying a 18.1% perpetuity growth rate and 139x terminal EBITDA multiple assumption. Long term fundamental valuations therefore would suggest there is further downside risk, but having said this, I would point out that other catalysts can often impact short term price action more strongly.</li>
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Systemic Risk could be a greater concern than company risk at this point: NIO remains a high beta EV play. While the 10-year Treasury yield looked more stable on Friday, any sudden spike in the Treasury yield can have a sharp negative effect on EV stock valuations.</li>
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A Short term Bullish Scenario: If the stock manages to reject the Dark Cloud Cover formation on Monday and close above its 10 day EMA, the move may accelerate price recovery with the first resistance level coming in at the 21 day EMA currently fixed at $35.68. Clearing these two hurdles may accelerate the upward momentum to the $38.19 - $38.67 zone, which represent the stock's current 200 DMA and the 61.8% Fibonacci Retracement, respectively.</li>
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A Short term Bearish Scenario: If Dark Cloud Cover is confirmed first support should come in at the stock's 78.6% Fibonacci Retracement at $30.98 which basically held recently. If the stock breaks below this level, however, the decline may accelerate towards the $20-22 zone last seen in October, 2020, over the next few trading sessions.</li>
</ul>Operating environment for NIO remains constructive. 3 month moving average sales volume comparison with XPEV and TSLA suggests NIO's volume sales have been more stable than its peers. Continuing sales growth in the context of overall improvement in 2021 auto demand and continuing tailwinds from the new car effect (EC 6) looks constructive for earnings implications over the next 1-2 quarters at current pace. At this point, therefore, we see more price risk stemming more from systemic risk than company risk.

NIO closed at $34.06 on Friday, failing to close above its 10-Day EMA of $34.42, although the stock climbed as high as $34.78 intra-day. DCF analysis using consensus FCF forecast suggests that currently NIO's shares may be implying a 18.1% perpetuity growth outlook which would be bearish if the yield curve continues to steepen. While fundamental valuation implications do not necessarily become reflected in stock prices over a short period, Friday's technical chart alignment could signal further bearish short term price action.

Bearish Technical Alignment on Friday: Dark Cloud Cover was formed on the daily candlestick chart on Friday. While the pattern needs to be confirmed on Monday, it may be a new bearish signal to what looks like an impending death cross that I mentioned in NIO: Is It Re-Entry Point Yet? on May 20.

DCF Analysis Reality Check: At current share price, 3-year consensus FCF forecast and 1Q21 balance sheet details suggest that the market may be implying a 18.1% perpetuity growth rate and 139x terminal EBITDA multiple assumption. Long term fundamental valuations therefore would suggest there is further downside risk, but having said this, I would point out that other catalysts can often impact short term price action more strongly.

Systemic Risk could be a greater concern than company risk at this point: NIO remains a high beta EV play. While the 10-year Treasury yield looked more stable on Friday, any sudden spike in the Treasury yield can have a sharp negative effect on EV stock valuations.

A Short term Bullish Scenario: If the stock manages to reject the Dark Cloud Cover formation on Monday and close above its 10 day EMA, the move may accelerate price recovery with the first resistance level coming in at the 21 day EMA currently fixed at $35.68. Clearing these two hurdles may accelerate the upward momentum to the $38.19 - $38.67 zone, which represent the stock's current 200 DMA and the 61.8% Fibonacci Retracement, respectively.

A Short term Bearish Scenario: If Dark Cloud Cover is confirmed first support should come in at the stock's 78.6% Fibonacci Retracement at $30.98 which basically held recently. If the stock breaks below this level, however, the decline may accelerate towards the $20-22 zone last seen in October, 2020, over the next few trading sessions.
Operating environment for NIO remains constructive. 3 month moving average sales volume comparison with XPEV and TSLA suggests NIO's volume sales have been more stable than its peers. Continuing sales growth in the context of overall improvement in 2021 auto demand and continuing tailwinds from the new car effect (EC 6) looks constructive for earnings implications over the next 1-2 quarters at current pace. At this point, therefore, we see more price risk stemming more from systemic risk than company risk.

NIO: Dark Cloud Cover with Close Below the 10-Day EMA on Friday May Add A Short Term Bearish Signal