NIO short-term options holders face major obstacles this week
NIO (NYSE: NIO) bulls have two big hurdles to clear this week, especially those with call options expiring in the coming weeks.
Firstly, the Chinese EV maker is expected to announce November sales figures. Last month, NIO reported a record number of vehicles delivered in one month, which kicked off a fierce bull run that drove the stock up 66% in the month of November alone.
A consolidation period was overdue as it was. Expectations on November delivery figures will be lofty — even healthy growth would warrant a price correction.
But delivery numbers are small potatoes compared to a bill that will be voted on in the House of Representatives called the Holding Foreign Companies Accountable Act (HFCAA). The Senate already approved this bill back in May with unanimous consent, a rare sighting in 2020.
Earlier this week, another Chinese EV manufacturer, Kandi, was accused of manipulating revenue figures after taking in around $100 million from American investors. Though the bill was already expected to pass in the House of Representatives, the Kandi fraud allegations will likely bolster support for regulation.
It’s hard to imagine President Trump wouldn’t sign it if it landed on his desk.
Why this matters for NIO
The bill would require Chinese companies listed on U.S. capital markets comply with U.S. security auditing requirements within three years or be delisted.
Chinese companies may be willing to comply with this scrutiny to maintain access to capital markets. They could even stand to benefit as it could bolster confidence in Chinese companies and subsequently, a windfall of investment. U.S. investors remain suspicious of Chinese enterprises after the Luckin Coffee fiasco earlier this year
However, it might not be in their hands. The Chinese government has long rebuffed auditing of its enterprises by foreign officials, which it sees as an encroachment on the country’s sovereignty.
Though the Chinese government has been supportive of NIO’s operations overall, including a $1 billion bailout in the beginning of the pandemic, it has a history of standing firm on its foreign policy enforcement.
After all, it did follow through with blocking Google, Facebook, and Reddit behind the “Great Firewall,” despite the economic opportunity for similar reasons NIO and other ‘blue-chip’ Chinese businesses including heavyweights like Alibaba (NYSE: BABA) and NIO-backed Tencent (NYSE: TCEHY), would have to overcome convince the government to allow for foreign audits.
Little carrot, lots of stick
That’s not even factoring in that NIO’s fundamentals seem to have cut all ties with share prices earlier this year.
That’s in part due to the extraordinary rally around the EV industry at large. But NIO has more going for it than sleek designs (because if you haven’t seen photos, they do look pretty great) and good old-fashion hype.
The runaway valuation of the company is at least in part due to bets on a new type of electric battery that will eliminate the need to charge for hours on standby. Like Tesla (NYSE: TSLA), this battery could open up new markets and business opportunities beyond the auto industry. Also like Tesla, the company’s CEO, Li Bin, is a successful serial entrepreneur worth betting on.
To wit, NIO’s rally could have very well carried on into 2021 despite a $54.5 billion market cap and record deliveries clocking in at just over a modest 5,000 — hardly enough to substantiate its current share price of just over $50.
Still, this week will be a rough one for NIO. For a stock that’s already been high risk, high reward investment, the scales just got tipped much deeper to the risk side. To think it will sail through these obstacles unscathed in the coming weeks would require a suspension of disbelief.
Investors who bought into NIO in October or even early November would be prudent to take some profits now.
Those brave enough to try and weather the choppy waters ahead should set their stop losses and watch support levels. If the price dips below $46.70, we’ll likely be seeing some long red candlesticks that are unlikely to fully bounce back until we see the direction U.S. foreign policy will head under the Biden Presidency and a Treasury under Janet Yellen.