Can Nio's Q3 Earnings Reignite The Rally Cut Short By Citron's Warning?

Nio Inc's NIO scintillating rally came to a screeching halt Friday after short seller Citron Research spoiled the party by suggesting the EV maker's astronomical valuation becomes unjustifiable.

Nio's Rally and The Hard Fall: Nio's stock, which ended 2019 at $4.02, began to turn the corner along with the post-COVID recovery in deliveries. The rally picked up steam amid the company's conscientious efforts to innovate, cut the flab and work further on its service-focused approach.

Ahead of Friday's session, the stock was up about 1,100% compared to Tesla Inc's TSLA 392% advance.

Nio started Friday's session on a strong note, thanks to strong quarterly results reported by domestic peer Li Auto Inc. LI, and went on to hit a high of $54.20. It took just six sessions for the stock to move from $40 to $50.

However, shares came under heavy selling pressure following Citron's report in which the firm gave Nio's stock a $25 price target. After being down about 16% at one point in the session, the stock has cut its losses to some extent to close down 7.7% at $44.56.

Related Link: Nio, Li Auto Make Big Moves Following Xpeng's Q3 Results

Is There Merit To Citron's Argument? Citron harped on Nio losing out on market share due to Tesla pricing, especially the "Made In China" Model Y, competitively. The U.S. EV giant's price cuts undoubtedly can hurt.

However, Nio has carved a niche for itself with its technological prowess and service-focused approach to lure customers.

After unveiling a 100-kilowatt-hour battery recently, the company is reportedly working on 150 kWh battery, which can nearly double the range of its EVs. According to reports, the company is also working on developing in-house chips for its ADAS system.

The company has managed to up its mindshare among consumers.

"Compelling evidence exists that consumers are increasingly perceiving Nio as a 'high-quality premium brand' with best-in-class technology and service," Deutsche Bank analyst Edison Yu said in a late September note.

The company has made its cars affordable by introducing the Battery-as-a-Service scheme, which trims a significant amount from the list price.

Nio is also eyeing global expansion and is reportedly building a separate team to work on the roadmap for exporting vehicles to Europe.

Can Earnings Salvage The Stock? Nio is scheduled to report its fiscal-year third-quarter results next Tuesday before the market open. Analysts, on average, estimate a loss of 17 cents per share on revenues of $652.77 million.

This represents a marked improvement from the loss of $2.38 per share and revenues of $262.47 million reported for the year-ago quarter.

Nio's third-quarter deliveries jumped over 150% year-over-year to 12,206, marking a quarterly record. The strong momentum continued into October, with the company reporting a 100% increase in deliveries to a record of 5,055 units for the month.

Valuation Stretched? The run-up seen since the second quarter has rendered Nio's valuation unattractive and unsustainable. For that matter, most EV stocks are showing frothiness and are in bubble territory.

That said, Nio has shown discipline and proactiveness in improving its fundamentals and is operating in the sweet spot of a booming Chinese EV market.

Fundamental performance in the months ahead will serve as a key to the stock's trajectory.