Nio stock forms risky pattern ahead of earnings: will it crash?

Nio stock price has pulled back in the past few months, moving from a high of $8 in October to the current $6. It has dropped below 24% from the year-to-date high, bringing its market capitalization to $12 billion from $15.35 billion in October.

Nio’s business is doing well as demand rises

Nio, a top Chinese electric vehicle company, is doing well as demand for its cars remains high. It has also performed well after launching other brands like ONVO and FIREFLY that have become highly popular in China. 

The most recent numbers showed that Nio’s vehicle deliveries jumped by 92.6% in October to 40,397. This growth brought its total deliveries in the third quarter to 241,618, up by 42% from the same period last year. Nio has now sold over 913,000 vehicles since its inception, meaning that it may hit the important 1 million milestone soon. 

These growth metrics are notable for a company that has been in business since 2014. Most of this growth came from its ONVO brand, which is now selling about 10,000 vehicles a month. 

Still, a major challenge for Nio is that its strong delivery growth has not translated to its revenue momentum. The most recent results showed that the company’s revenue rose by just 9% in the second quarter, even as its deliveries jumped by 25%. 

A likely reason for this is that it has increased its discounts as competition in the country jumps. This competition is coming from top companies like BYD, Geely, Chery, and SAIC. A good example of this is XPeng, its rival, which published strong results but issued a weaker-than-expected guidance.  

Nio earnings ahead

The next key catalyst for the Nio stock price will be its earnings, which will come out next week.

These results are expected to show that its revenue rose by 19% in the last quarter to 22.2 billion yuan as its vehicle sales continued growing. 

Most importantly, the company’s earnings-per-share will be a loss of 1.6 yuan, an improvement from the 2.14 yuan it made in the same period last year.

The most important catalyst for the stock will be its guidance, which will shed more color on the impact of competition in China that has affected other companies like Xpeng and BYD.

Analysts predict that Nio's fourth quarter revenue will be 89 billion yuan, up by 36% from the 65.6 billion yuan it made last year. It will then make 127 billion yuan next year, representing solid growth.

The main risk for investing in Nio is that the company has a long history of losing money, which has led to more dilution. Its recent dilution happened in September when the company raised $1.6 billion, which it plans to use for research and development.

Nio stock price technical analysis 

The daily timeframe chart shows that the Nio share price has retreated in the past few weeks, moving from the year-to-date high of $8 to the current $6.

A closer look shows that the stock has formed a head-and-shoulders pattern, a common bearish reversal signs. This pattern has a close resemblance with a double-top.

It has moved below the 50-day and 25-day Exponential Moving Averages (EMA) and the Major S/R pivot point of the Murrey Math Lines.

Therefore, the most likely scenario is where the stock continues falling, potentially to the strong, pivot, reverse level of the Murrey Math Lines at $4.70. A move above the resistance level at $7 will invalidate the bearish outlook.