Why NIO shares are up 20% this week

Stock markets around the world have enjoyed a strong week. And individual stocks like NIO (NYSE:NIO) have joined the party. In fact, NIO shares are up 20% this week, trading just below $10. Here’s what’s been going on and where the stock could go in coming weeks.

More help coming from China

The first boost for NIO shares came from news out of China. Given the production facilities, corporate ties and consumer demand from China, the fate of NIO is very closely linked to how the country performs.

Data in recent months has indicated that the country is slowing down, which has spooked some investors. Yet this week, two positive news stories broke. The first was confirmation of an interest rate cut of 0.1%, the first since August 2022.

Lower interest rates help to ease the cost of borrowing and boost general consumer demand. NIO will benefit from both angles here when trying to produce and sell electric vehicles.

The other point was various stories that a stimulus package from the government is coming. This is rumoured to include tax incentives and credits for things like electric vehicles. If realised, this would be a huge boost for the company.

Cheering a US Fed pause

Another element that helped to lift the share price this week was improved investor sentiment in the US. Even though the stock can be bought in Hong Kong, it can also be traded on the NYSE.

On Wednesday, the Fed — the US central bank — decided to pause interest rate hikes for the first time in 10 months. Investors cheered this good news, with growth stocks in particular rallying strongly as a result. NIO shares were caught up in this positivity and were able to ride the wave on Wednesday onwards.

In a similar way to the reaction to the Chinese rate cut, the fact that the Fed didn’t raise rates is taken as a positive for stocks. It should help to ease pressure on issuing new debt but also help consumers to feel more confident in spending.

The direction from here

It’s important to note that over the past year, NIO shares are still down 49%. This is the result of both company-specific and China-related concerns.

So, when thinking about the 20% move this week, it’s clear that the stock still has a long way to go before we can start talking about it being overvalued.

Somewhat surprisingly, the Q1 2023 results weren’t that spectacular. Vehicle sales fell by 0.2% versus Q1 2022 and dropped by 37.5% versus last quarter. A key risk going forward is whether the business can maintain a growth rate in order to reach consistent profitability.

Ultimately, I feel the positive sentiment coming out of China could help to carry the share price higher still in coming weeks. Yet for it to get to 52-week highs, I believe we need to see the company financials significantly improving.