The truth behind NIO's 60.0% upside

Key Points

• Shares of NIO are rising by 10.8% after the Christmas break; the reasons behind the upside may surprise you.
• A new model unveiling could be accredited with some of the excitement. Still, one more concrete and fundamental factor is driving the stock's wheel. 
• Analysts and traders seem to be on board; now is the time for NIO to shine.

Some investors are still feeling the burns from investing in Chinese equities throughout 2023; once considered the darling of emerging markets, today even The Goldman Sachs Group NYSE: GS has been pushed to admit that their views were maybe a little too premature toward Asia's powerhouse financial market. But does that mean it is too late for everyone else?

Well, it really depends on who you ask. Following the crowd's opinion could be an excellent way to protect your wealth from any potential downside, but if you are here to get exposure to growing your wealth and potentially securing a more comfortable retirement in the future, then now is the time to look into China.

At least that is the attitude that guys like Ray Dalio are bringing today by buying up names like the iShares MSCI China ETF NASDAQ: MCHI, which holds the top Chinese firms. On a more specific level, options traders have recently stampeded into NIO NYSE: NIO, and there is enough evidence pointing to a continued bull run in this stock.

Connect the dots 

Coming back from Christmas break, NIO stock opened Tuesday's reopening session rallying by as much as 10.8% for the day. Some may say that this is just a delayed effect of the market due to its closing for Christmas day on Monday, however, there is much more than meets the eye.

If you are looking for a more concrete reason behind NIO's rally on Tuesday, you will likely land at the headlines stating that the company recently unveiled its newest design for a flagship high-end electric vehicle to be introduced into the marketplace.

Because the Chinese electric vehicle market is mostly dominated by names like Tesla NASDAQ: TSLA, especially now that Elon has decided to expand the company's presence further into the country. BYD OTCMKTS: BYDDY is also a respectable competitor in the region, and for good reason.

Now that BYD has landed an exclusive deal with Sociedad Quimica y Minera de Chile NYSE: SQM regarding Chile's lithium reserves and mining rights, the Chinese entity is setting up to achieve the highest margins for the lower price ranges in the electric vehicle market.

This dynamic would put BYD's competitors in a tough spot to attract investment dollars into their stock; for NIO, though, that is just music to their ears. Since NIO's cars are focused on the wealthier audiences in Asia, pricing cars well into the six-figure range, BYD's success only creates less competition for NIO.

Read the tape

Markets can sometimes seem like the Kentucky Derby or any other similar horse race. You can do all the research you want into a horse and its rider, even do mathematical and statistical analysis to put the odds in your favor, but at the end of the day, it is the dealers who control the odds. 

These dealers typically bet big, and they bet late. With stocks, this sort of 'tape reading' can be found in the options market, as big dealers will typically bet big and bet late before they think a stock will begin its new leg up or down.

In case you have never read these order flows or just don't have the time to sit at a trading platform all day hoping you can catch it, MarketBeat offers a daily run of unusual option trades for both calls and puts (for assumingly bullish and bearish trades).

Why would traders recently look to buy call options at an unusual volume? Maybe they got wind of the new model unveiling or simply rode the bullish momentum from the company's latest financial quarter results. As a KPI (key performance indicator), deliveries clearly opened the path for a coming rally.

The second quarter of 2023 brought NIO total deliveries of 23,520 vehicles, which was a decrease of 24.2% from the previous quarter. That trend changed in the last quarter, where deliveries totaled 55,432 for a jump of 135.6% to set a new pace for future demand!

Because of this recent fundamental momentum in the business, which is not expected to slow down given the recent options activity in the iShares MSCI Emerging Markets ETF NYSEARCA: EEM also pointing to a bull run in these markets, analysts feel very comfortable projecting earnings per share growth of 31.1% for NIO into 2024.

A cherry on top, in case you are considering a potential investment, is the fact that oil prices are back on the rise, and you should know by now that this historically only makes E.V. stocks all the more attractive as an alternative.