Ticker Reports for June 8^th

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(From Behind the Markets)

Is NIO Stock Bottoming? Understanding Cyclicality

After announcing their first quarter 2024 earnings results, shares of NIO Inc. (NYSE: NIO) are now falling by as much as 7% in the day’s trading session. Despite the negative media surrounding Chinese stocks and some disappointing figures for NIO recently, this event could mark the start of a bottoming for the stock and maybe even a new leg higher.

Automotive stocks like Tesla Inc. (NASDAQ: TSLA) have also seen their stock prices lower significantly, with the electric vehicle company trading down to 60% of its 52-week high price. Wall Street defines a bear market as a 20% - or more – decline from recent highs, bringing Tesla into a deep bear market. But that’s not necessarily due to adverse developments in electric vehicles (EVs).

NIO stock is tragically trading down to merely 30% of its 52-week high, starting to suspect whether this is now a deep value play. Before understanding why the EV world is doing fine today, here is why NIO stock is an upside swing in the making.

The Role of Demand Cyclicality in NIO Stock’s Price Movements

Historically, NIO's vehicle deliveries do best in each fiscal year's second and third quarters, with a bonus suspenseful number coming each fourth quarter. What is typical about today's earnings results is that the company's first quarter of each fiscal year has been the worst.

Looking at NIO’s press release, investors can notice how deliveries declined by 40%. However, every quarter, when deliveries are broken down on a monthly basis, the story begins to look a lot for the company’s demand cycle.

In April 2024, NIO delivered 15,620 vehicles, showing an annual growth of 134.6% compared to deliveries for the same month last year. For May 2024, deliveries increased to 20,544, easing the company into its second quarter of the 2024 rising demand cycle. By the way, that’s a 233.8% delivery increase from May 2023.

Here’s how the stock has reacted to these cycles in the past. In 2023, the first quarter saw the price of NIO stock decline from roughly $14.2 down to $7, that’s more than a 50% drop. The following quarters (second and third) brought the stock up to $15.8 from its $7 low, giving savvy investors a net return of 125.7%.

Suppose history is set to repeat itself (so far, deliveries from April to May suggest it will). In that case, investors could witness NIO stock bottoming after its post-earnings selloff. Analysts on Wall Street also think that the following quarters could deliver market-beating returns for those brave enough to hold the stock through recent turbulence.

Understanding NIO Stock’s Future Outlook: Valuations and Market Expectations

Today’s consensus price target for NIO stock lies at $8.4 a share, daring the stock to rally by as much as 71.4% from where it has fallen today. Knowing that the stock is actually making its way into, historically, the best quarters of the year, these analysts feel comfortable enough sticking their necks out there.

Not even those who are bearish about Chinese stocks are willing to put their money where their views are. NIO stock’s short interest collapsed by up to 13.3% over the past month, opening the way for bullish traders to fill the gaps left behind by these short sellers leaving the stock behind.

Now, here’s an exciting trend that investors can support. It is usually a stealthy strategy that markets use when looking to go long on a stock without making a lot of noise; it’s all in how the stock’s valuation multiples are changing.

Specifically for NIO stock, the way that price-to-sales (P/S) and price-to-book (P/B) ratios are diverging against the rest of the auto sector.

NIO stock traded down to a 1.2x P/S ratio, which is heavily discounted against the auto sector’s average 11.9x P/S valuation. There’s a straightforward reason behind this discount: Investors discount NIO’s sales because they are simply scared off by Chinese equities, though that could be a mistaken view.

Chinese inflation rates have risen for the past quarter (on a consecutive monthly basis), meaning that domestic demand for products, including EVs, is suggested to be on the rise. Because of this, markets are willing to place a premium valuation on a P/B basis.

Trading at 2.5x P/B, NIO commands a premium of 10.6% over the auto sector’s average 2.2x P/E today. Why would markets be willing to overpay for NIO’s book value? It’s got everything to do with management’s guidance for the next quarter.

Management points to deliveries of 54,000 to 56,000 units for the second quarter of 2024, representing a 138.1% increase from the previous year. While this is up to assumptions, it is still a realizable target for NIO to accomplish, building the case for today’s potential bottoming.

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Chevron Stock Concerns: Perspectives Make the Difference

Chevron Corporation (NYSE: CVX) is on many investors' lists of forever stocks. At the very least, it makes a short list of energy stocks that investors consider when they believe oil prices are likely to rise. The 20-year total return (stock price appreciation plus reinvested dividends) on CVX stock is 651.45%. That means a $1,000 investment in Chevron 20 years ago would be worth approximately $7,510.45.

But in our microwave society, many investors are reluctant to hold a stock for 20 months, let alone 20 years. And the short-term performance of CVX stock has been less than stellar. You can blame lower oil prices, but that only tells part of the story. There was also some concern that Chevron would not receive approval from Hess Corporation (NYSE: HES) shareholders on its $53 billion all-stock merger.

That approval occurred on May 27, 2024. Although the merger still requires regulatory approval and arbitration with Exxon Mobil Corp. (NYSE: XOM) over Hess's Guyana assets, the path forward now appears to be a matter of crossing t's and dotting i's.

Still, for growth-oriented investors, Chevron's been a tough hold for the last couple of years. Nevertheless, understanding the historical and cyclical nature of oil and gas stocks in general and CVX stock in particular can help you decide if CVX is a good investment.

Despite Record Extraction, Chevron's Revenue Declines

Despite Chevron extracting a record amount of oil in 2023, the company's year-over-year (YOY) revenue was down 22%. And the company's earnings per share were even worse, showing a 43% decline in the same period.

It seems like a contradiction, but CVX investors know it all too well. "Drill baby drill" is a nice line in a campaign speech, but it's not necessarily evidence of stock price gains in the oil sector. That's because getting oil out of the ground takes a lot of money, and the payoff doesn't come immediately.

Chevron shareholders saw similar stock price performance (or lack thereof) between 2017 and 2019. This was also a time when oil companies were expanding their drilling capacity. However, the Hess merger may be different this time, which will give Chevron far more leverage over future oil prices. The company is already an industry leader when it comes to return on capital.

Analysts See More Upside for Chevron

The Chevron analyst ratings on MarketBeat give Chevron a Moderate Buy rating with a consensus price target of $186.95. That's 19% above the current price without factoring in reinvested dividends. Three analysts have targets above the consensus, including Wells Fargo & Co. (NYSE: WFC), with the highest price target of $206.

Chevron Stock is Down, But Far From Out

In the 12 months ending May 31, 2024, CVX stock, including price appreciation and reinvested dividends, had a return of 12.26%. That's hardly dead money, but it's far below the performance of the S&P 500 Index, which has a return of 26.18% over that same period.

Nevertheless, Chevron, with or without the assets from Hess, is early in its investment cycle. Over time, that points to long-term share price growth. And even if Chevron opts to continue drilling even if it leads to lower revenue, the company's break-even price for oil is somewhere in the high $50 range. That means the company could gain market share.

In the meantime, investors can collect a safe dividend that yields 4.18% as of June 6, 2024. Chevron is also a dividend aristocrat that has increased its dividend for 37 consecutive years—that streak won't be ending anytime soon. The payout of $6.52 per share is a selling feature for income investors.

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NuScale Power: Can SMR Power the Clean Energy Transition?

NuScale Power Corporation (NYSE: SMR) is at the forefront of the nuclear energy sector, which is part of the renewable energy sector. NuScale focuses on developing and deploying advanced, small modular reactor (SMR) technology. This innovative approach to energy production promises to deliver clean, reliable, and scalable carbon-free energy, a crucial element in the global energy transition towards a more sustainable future. The company has achieved a significant milestone as the first and only SMR technology to receive design certification from the U.S. Nuclear Regulatory Commission (NRC). This certification is a testament to NuScale's commitment to safety, reliability, and regulatory compliance.

NuScale's Business Model and Technology

NuScale's business model focuses on providing turnkey SMR solutions for a variety of energy applications. The company's core product is the NuScale Power Module (NPM), a small, safe, and reliable pressurized water reactor that can generate 77 megawatts of electricity, enough to power approximately 46,000 homes. All of this from a reactor vessel approximately sixty-five feet tall and nine feet wide.

NuScale Power's VOYGR power plants comprise modular units configurable to deliver one to twelve Net Power Modules (NPMs). VOYGR, a small modular reactor (SMR) plant, utilizes the company's NuScale Power Module for energy generation. VOYGR is safer, cleaner, smarter, and more economical than large nuclear power plants. Its simplified design reduces construction, operation, and maintenance costs, making it a cost-effective energy solution.

NuScale's SMR technology features inherent safety systems, including a passive safety system that can mitigate accidents without operator intervention. The company is also focusing on developing advanced applications for its technology, including generating clean process heat and hydrogen production.

NuScale's Financial Performance and Strategy

NuScale's financial performance in the first quarter of 2024 reflects the company's ongoing transition from research and development to commercialization. NuScale’s earnings report revealed revenue of $1.4 million and a net loss of $48.1 million. While the net loss is significant, it is partially attributed to a one-time charge related to cost-reduction efforts associated with the transition to commercial operations.

To ensure long-term financial stability, NuScale implemented strategic initiatives to align resources with its commercialization goals. Starting in the second quarter of 2024, these initiatives have resulted in annualized savings of approximately $50 million to $60 million. NuScale also maintains a strong cash position, ending the quarter with cash and equivalents of $137.1 million, $5.1 million of which is restricted.

Valuation and Analysts' Opinions on NuScale

NuScale's current market capitalization stands at $1.88 billion. This valuation reflects the company's early-stage development and the high capital intensity of the nuclear energy sector. Analysts' opinions on NuScale are mixed, with a consensus rating of "Hold" and a consensus price target of $7.75. While some analysts see growth potential and are bullish on NuScale's future, others are more cautious, citing the inherent risks and challenges associated with developing and deploying nuclear technology.

Key Metrics and Analysis

Several key metrics provide insights into NuScale's financial health and market position. The company has a low debt-to-equity ratio, indicating a low level of debt and a solid financial foundation. Institutional ownership currently represents 15.28% of NuScale's outstanding shares, suggesting a level of confidence from institutional investors. However, the company faces a high short interest, representing 17.74% of the float, which could indicate potential bearish sentiment from some investors.

Technical analysis reveals that NuScale's stock has been volatile in recent months, with a high trading volume. The 100-day moving average for NuScale’s stock is currently at 4.85, while the 200-day moving average is at 4.40. This suggests that the stock has experienced significant price fluctuations and may continue to exhibit volatility in the near term.

Recent News and Market Opportunities

The demand for energy is skyrocketing, fueled by several factors. These include the increasing electrification of transportation, the growing energy demands of power-intensive industries, and the need for climate change mitigation through heating and cooling solutions. This increasing demand presents a significant opportunity for NuScale, as its technology is ideally suited to meet the needs of a wide range of customers.

NuScale’s headlines highlight the company’s expanding market reach. The company is actively engaged in conversations with major players in the data center and artificial intelligence (AI) sector. These companies require a reliable and uninterrupted power supply, which NuScale can provide through its scalable and carbon-free SMR technology. NuScale is also exploring opportunities in the industrial sector, where its technology can generate clean process heat for various applications.

NuScale Power stands at a critical juncture in its development. While the company faces significant challenges and uncertainties inherent in the nuclear energy industry, it also presents a compelling investment opportunity for investors seeking exposure to the burgeoning SMR market. NuScale's NRC-certified technology, growing market opportunities, and strong financial position provide a foundation for future growth. However, investors must weigh the potential benefits against the risks. NuScale's success will ultimately depend on its ability to overcome regulatory hurdles, secure financing for large-scale projects, and successfully demonstrate the safety and reliability of its SMR technology.