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Trimming a Charged-Up Position

We're ringing the register and taking some profits in Nio Inc. after a healthy rise in the electric vehicle maker's shares since the end of May.
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After you receive this alert we will sell 200 shares of Nio Inc. (NIO) at or near $5.60. Following the trade, the portfolio will own 1,000 NIO shares, roughly 2.9% of the portfolio.

Over the last few days our shares of Chinese electric vehicle maker Nio were the recipient of back-to-back favorable pieces of news that lifted the stock more than 40% since the end of May. Those two positive items were the following:

--Tuesday, June 2: The China Association of Automobile Manufacturers disclosed vehicle sales in China were estimated to have increased 11.7% to 2.14 million in May. Even though year-over-year comparisons were down, May marked the second sequential uptick in vehicles sales following April’s rebound. For some context, that marks the first back-to-back monthly sales increase in China in about two years.

--Wednesday, June 3: Goldman Sachs lifted its rating on Nio shares to a Buy from Neutral and upsized its price target to $6.40, citing the company’s “surge in demand.” It also offered that Nio has a “waiting list of buyers, joining the likes of the Toyota Highlander, Tesla Model 3, SAIC-GM GL8, and select models of Lexus."

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Adding to those tidbits, Nio here on Thursday reported May deliveries of 3,436 units, up almost 9% compared to April. Tallying the first two months of the current quarter, Nio delivered 6,591 vehicles, which leaves 2,900 to 3,400 deliveries needed in June to hit its forecast of 9,500 to 10,000 deliveries for the quarter. In our view, the company is well on its way to hit the upper end of its forecast. While we are thrilled with the stock's performance, we’d note NIO shares are up significantly since the market bottomed this year and that they once again have entered overbought territory. We’ve seen situations like this before when stocks were essentially priced to perfection, most recently with our Farfetch Ltd. (FTCH:Nasdaq; $15.07; 3.1%) shares, and we prudently took some chips off the table ahead of that company’s quarterly earnings report. Here on Thursday we are doing the same with NIO shares. To be clear, we continue to like the NIO story long term, which is why we are only doing some trimming today and keeping roughly 2.9% of the portfolio’s assets in the shares.

With Nio’s May vehicle data now in hand, we will now look to revisit our $4.50 price target with an upward bias. That price target was based on a relative valuation to Tesla Inc. (TSLA) shares, with our thought being that as Nio continues to execute, widen its portfolio and deliver more vehicles its deep discount relative to TSLA shares would begin to close. Since the market bottom TSLA shares have rocketed higher to more than $880 from the March 18 low near $361. That increase has far outstripped the move in NIO shares, keeping them at very deep discount.

Sticking with that original valuation strategy, we are boosting our price target on NIO shares to $6.25, which based on the current share price offers upside of roughly 10%. As such, we are downgrading NIO shares to a Two from One. We will revisit both our rating as well as our target price as Nio reports its vehicle deliveries for the second half of the year.

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