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Why NIO Stock Is Falling Today

By John Rosevear – Jul 17, 2020 at 10:33AM

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Goldman Sachs downgraded the stock, but it's a little complicated.

What happened

Shares of Chinese electric-vehicle maker NIO (NIO 0.54%) opened lower on Friday, after a Goldman Sachs analyst urged caution and downgraded the stock in a new note.

As of 10 a.m. EDT, NIO's American depositary shares were down about 9.5% from Thursday's closing price.

So what

In a new note released early on Friday, Goldman Sachs analyst Fei Fang cut his rating on NIO's shares to sell, from neutral, while maintaining his previous price target of $7. 

Fang's reasoning for recommending that auto investors sell NIO's shares is simple: After an 89% rally in the past month, with no significant changes to the company's story, he thinks that NIO's current share price reflects "over-optimism." (My take: He's probably right.) 

NIO's ES8 and ES6 electric SUVs parked in front of a NIO store

Image source: NIO.

Notwithstanding his sell recommendation, Fang isn't exactly bearish on NIO's long-term prospects. The analyst, who had a buy rating on NIO's stock just six weeks ago, wrote that the long-term investment case rests on structural forces in China's vast auto market that point to the growth of premium brands and electric-vehicle sales generally, as well as NIO's specific appeal as "China's first home-grown high-end passenger-vehicle brand." 

Simply put, in Fang's view, the company has the potential for a bright future, but the stock price has risen beyond levels that are justified by the near-term fundamentals. 

Now what

It will be interesting to see how NIO's senior executives respond to the rapid run-up in the company's stock price over the last several weeks. While the run-up was probably triggered by NIO's very strong second-quarter sales report, it might be time for the company to temper investors' expectations.

We'll see what happens when the company reports its second-quarter earnings results, likely sometime next month. 

John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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