The stock sold off significantly and lost a third of its value over the past six months. I’ve been watching the stock closely to see whether I can join in on any potential pullback buying opportunities. But I’ve identified key areas of concern that I don’t see leaving the playing field anytime soon.
NIO stock is still a strong sell until a few things start aligning. Let me explain why.
Pricing Metrics and Valuation
To start off with, let’s discuss the cornerstone of return measurement, that being the Sharpe ratio that measures expected return above the risk-free rate relative to volatility.
Nio’s Sharpe ratio is currently trading at -2.7% versus the S&P 500, which is trading at 6.7%. This means that even if you’re seeking a China pullback gamble, NIO’s stock provides you with some of the worst odds.
Looking at basic value metrics also makes for a disappointing outlook. NIO stock’s price-sales, and price-cash flow ratios are trading above their sector benchmarks by 815.2% and 872.5%, respectively. You could argue that price multiples don’t matter for such an early-stage stock, but if you’re comparing it to the sector, it surely does.
If we examine the balance sheet, you can’t really say that Nio’s going to rise in value at any time soon. Its negative interest coverage ratio (-11.6) and its 57.6% leverage mean that the company’s equity value may be diluted even more in the near term.
OK, so we all know about the Evergrande story by now and how hardline Chinese economic policies have affected the markets. But I’d like to touch on something else, which is overlooked by many.
ESG, which stands for environmental, social and governance. It’s often a thematic criterion used by institutional investors to filter through investment ideas. There’s much focus on the governance part of ESG, which relates to financial reporting and disclosures.
Chinese companies’ American Depositary Receipts, including Nio, have been under scrutiny by the Security and Exchange Commission for not disclosing covenants, contractual obligations linked to financial performance, and quantitative metrics.
Institutional investors are apprehensive about these issues as they have their ESG standards to adhere to. As a result of the controversy, many have sold off their shares, and it’s anticipated that this will continue for the time being.
What Now For NIO Stock?
NIO stock is close to oversold territory, with its relative strength index hovering in the mid-30s. The problem is that the stock’s still trading below its moving averages, and I don’t think that will change during a period with a risk-off mood.
NIO stock is fundamentally flawed and under regulatory pressure; I thus think there’s no way back for the time being.
On the date of publication, Steve Booyens did not hold any long or short positions in any of the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Steve Booyens co-founded Pearl Gray Equity and Research in 2020 and has been responsible for equity research and PR ever since. Before founding the firm, Steve spent time working in various finance roles in London and South Africa, and his articles are published on various reputable web pages such as Seeking Alpha, Fintech Zoom, Gurufocus, and Yahoo Finance. Steve’s content for InvestorPlace includes stock recommendations, with occasional articles on crowdfunding, cryptocurrency, and ESG.