Stock of the week: NIO

• NIO shares continue to rally

• Over 900% YTD gain

• Record deliveries in August, September and October

• Earnings release on Tuesday, November 17

• Double bottom pattern near $40

Rally on Tesla shares has faded following a split and stock began to trade sideways. However, not every EV manufacturer sees similar sluggishness in their share price moves. Share price of the Chinese company NIO (NIO.US) has been enjoying strong upward momentum recently and there are some solid fundamental reasons behind it.

Streak of record deliveries extends into October

NIO shares are trading over 100% above close of the Q3 2020 and over 900% higher year-to-date! Company has reported solid results so far this year and latest deliveries data has been stellar. NIO delivered 3 956 vehicles in August setting a new record. However, it was broken just a month later with September's deliveries coming in at 4 708 vehicles. This record did not hold for long as the company said last week that deliveries in October reached 5 055 - another monthly record! 

A point to note is that NIO sells its vehicles only in China. Entering more countries could result in another surge in demand. However, NIO said that currently it has no roadmap for branching into new markets.

Q3 earnings release on Tuesday, November 17

While deliveries data can give us hints on demand, it does not show a full picture. More clarity on NIO's performance in the July-September quarter will be provided on Tuesday, November 17 when the company releases its earnings report after the Wall Street session close. Markets expect $0.17 loss per share in Q3 2020. This would be a slightly bigger loss than $0.15 reported in Q2 2020. However, this can be ascribed to increasing scale of operations as revenue is expected to come in at $655 million, compared to $525 million in April-June quarter. Investors will also be eager to know whether the company plans to increase production capacity. It currently stands at 5 000 vehicles per month, meaning that NIO has been selling almost all cars it produces in recent months.

Valuation concerns

The main sources of concern when it comes to NIO, just like for other pure-EV manufacturers, is of course its valuation. Neck-breaking pace of this year's share price rally has put NIO at a market capitalization of almost $58.7 billion (as of November 11 close). To put this figure into context, market capitalization of General Motors stands at $58.05 billion. One could say that the high valuation of NIO highlights the fact that electric vehicles are the future. However, one should not forget that "traditional" carmakers are also branching into the EV market and thanks to their size, they will find it way easier to scale up production to meet rising demand. Not to mention the fact that sales of combustion-engine cars are turning in profits that are enough to offset R&D costs of electric vehicles. Meanwhile, pure-EV manufacturers remain cash burning machines.

NIO (NIO.US) has been enjoying a strong rally this year. However, stock dropped over 7% on Tuesday amid rotation out of tech. Investors treated it as an opportunity and rushed to buy stock. As a result a double bottom pattern was painted near the $40 handle. Near-term level to watch for bulls can be found at the recent all-time high in the $45 area. Note that daily lows from Tuesday and Wednesday were painted near the 50-hour moving average (green line). Source: xStation5