VWAPY - NIO Surges As Volkswagen Invests In XPeng - Don't Be Tempted

2023-07-27 08:25:29 ET

Summary

• NIO stock has experienced a stunning recovery, invalidating my previous bearish thesis. Buyers jumped onto the bandwagon as Volkswagen formed a new partnership with XPeng.
• The news has spurred significant optimism that Nio could work with other automakers to form a partnership.
• Speculation of a potential NIO-Mercedes-Benz partnership adds to the positive sentiment, but collaboration challenges exist. Buying on rumor doesn't seem like a sound investment strategy.
• While my Sell thesis has been invalidated, it doesn't mean investors should turn bullish and jump on board now. Stay on the sidelines.

A stunning recovery by NIO Inc. ( NIO ) stock as it surged well past my previous bearish thesis , as sellers were utterly demolished. As such, I consider my sell thesis on NIO invalidated, but I must highlight that I didn't execute any short-sell calls.

I had already exited my positions in NIO and redeployed my funds into other stocks. Hence, I remain invested, but not in China's leading pure-play premium EV maker. Despite that, I must admit I missed NIO's significant rally, as I didn't anticipate buyers returning with a vengeance.

However, I also updated investors in my previous article that "NIO still holds promise," suggesting high-conviction investors could still consider keeping their positions. Given NIO's recent significant outperformance, these holders have been duly rewarded, as several factors contributed to NIO's recent optimism. However, one stood out as the critical driving force this week, as it led to a spike in NIO's price action, likely taking out short-sellers in NIO, as it posted a short interest as a percentage of float of 7.7% in mid-July.

Notably, XPeng ( XPEV ) and Volkswagen ( VWAGY ) announced a significant announcement this week. Volkswagen has decided to invest $700M into a partnership with XPeng, which sent XPEV to levels last seen in August 2022.

Morgan Stanley opined that Volkswagen's investment is significant, as it could herald the "beginning of potential strategic partnerships in the Chinese EV market." With Volkswagen struggling to maintain momentum in China as it lost its market leadership recently to BYD Company ( BYDDY ), the German automaker is under significant pressure to defend its competitive edge in its critical Chinese market.

Hence, I assessed that Volkswagen's investment seems timely, as it needs to address its software challenges. Moreover, XPEV's stock traded close to its December 2022 lows earlier this month, indicating a potential opportunity. With Volkswagen paying about $15 per ADS to acquire a 4.99% stake in XPeng, investors rushed in, pushing XPEV to nearly $22 yesterday.

Volkswagen's investment is expected to open up higher margin revenue streams for the embattled XPeng, as it struggles to scale its hardware sales, given BYD's competitive edge. As such, I believe the market has likely reflected the possibility of Nio entering into a potential partnership with another leading automaker looking to cement its market share in China.

Who could it be? According to reports in China, an NIO-Mercedes-Benz partnership could be in the works, although there's no confirmation yet. Mercedes-Benz ( MBGAF ) competes with NIO in similar market segments, which makes a partnership viable. Also, CEO Ola Kaellenius articulated recently that the company will " prioritize the Chinese market in its upcoming wave of electric vehicles starting from 2025."

There were suggestions: "Mercedes would use Nio's battery swap network and build next-generation models based on Nio's standards." However, there isn't any confirmation on that rumor, suggesting investors who bought on NIO's recent surge could be seen as attempting to "front-run" the market.

However, Deutsche Bank ( DB ) analysts reminded that " Nio's platform requires battery swap technology, which may not be attractive to traditional car companies." In addition, the company's expansion into other sub-brands could make potential "collaborations complex." Therefore, I assessed that NIO holders who added to the recent surge could be disappointed if such a partnership does not pan out soon.

Nio has performed better with its recent June delivery performance as it delivered 10.71K vehicles, markedly above its May lows of 6.16K. However, it's still far below the requirements needed to attain its 250K annualized target, suggesting to investors its upcoming July deliveries will be carefully assessed.

Based on recent insurance registration data, " as of July 23 , Nio sold 12,700 vehicles during the month." Therefore, Nio is on track to outperform June's metrics but is still far below its monthly target. As such, a sharp second-half growth inflection is looking unlikely, indicating that the recent spike is likely linked to the XPeng-Volkswagen partnership. With that in mind, I don't encourage investors to join the bandwagon, hoping that Nio has what it takes to turn it around consistently.

With NIO taking out its March 2023 highs, my Sell thesis has been invalidated. As such, investors who want another validated sell level to cut exposure must remain patient.

However, investors who waited for a significant surge to cut exposure can still consider using the recent spike to exit if they don't expect Nio's forward operating performance to justify the recent buying sentiments.

With that in mind, I return to the sidelines as we anticipate NIO's next moves and upcoming deliveries.

Rating: Hold (Revised from Sell).

See additional disclosure below for important notes accompanying the thesis presented.

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