Thu. 10 Jun 2021, 6:00pm ETBenzinga
In: Analyst Color, News, Global, Analyst Ratings, Trading Ideas

Shares of Tesla, Inc. (NASDAQ:TSLA) and its Chinese rival NIO Inc. (NYSE:NIO) have recently begun to diverge in stock performance in a possible reflection of weakening sentiment toward the U.S. company.

How Tesla, Nio Are Historically Correlated: Looking back into history since Nio began trading as a public company in the U.S. in September 2018, shares of Nio and Tesla have mostly traded in the same direction, except in stray periods.

Once such divergence occurred in late 2019, when Nio was struggling to stay afloat as a "going concern" due to the liquidity crunch it was facing.

The stocks converged after Nio began to sort out its liquidity crunch by arranging debt financing.

For a time, until mid-October 2020, Tesla was outperforming Nio even as the stocks were moving in the same direction.

As Nio's fundamentals were looking up, the Chinese EV maker's stock mostly outperformed Tesla shares. Momentum took Nio's stock to an all-time high of $66.99 on Jan. 11.

Tesla peaked a little later, with the shares hitting a split-adjusted high of $900.40 on Jan. 25.

Both stocks cooled off subsequently, with the marketwide tech sell-off in March taking them down further.

However, the directional correlation was preserved. The uneven recovery that followed after the early March lows also occurred in lockstep for Tesla and Nio. 

Tesla and Nio shares had an uninspiring May, with the former pulling back all way toward the March low of $563 but holding support around the level.

Nio, however, violated the early March low of $35.21 and dropped to a fresh year-to-low of $31.22 on May 13.

While Nio has nicely recovered from this low point, Tesla has struggled to break out of the $600-$630 trading range seen since late May.

Related Link: Why Wells Fargo Says Tesla's Present Is Perfect, Future Tense

Nio Gains As Tesla Falls: Tesla's stock trajectory has taken a turn for the worse since the start of June, even as Nio is moving higher. Since the start of June, Tesla shares are down 3.5%, while Nio has moved up about 13% in the same timeframe.

Is the divergence a reflection of concerning fundamentals at Tesla? The company is under pressure in its key Chinese market. A combination of factors, including negative press over safety issues with its cars and increasing Chinese government scrutiny over sensitive data being collected by on-board cameras, have impacted Tesla.

After weak sales in April, Tesla's sales rebounded in May.

Tesla's Complex Business: Notwithstanding the recovery, the company is facing competitive pressure as it contends with homegrown EV rivals in China. 

Globally, Tesla's EV market share dipped from 29% in March to 11% in April, a CNBC report said, citing Credit Suisse analysts.

Tesla, although making a profit, is often criticized for relying on non-core items such as EV credits and Bitcoin trading. Vehicle margins are under pressure amid competition from new entrants and traditional automakers.

Expressing concerns over Tesla's medium-term picture, Wells Fargo Securities analyst Colin Langan outlined tapering demand for Model 3/Y vehicles, higher EV battery raw material costs and U.S. regulatory risk as the company's biggest risks in a note. 

Nio, which has had its share of trouble with chip shortages, is holding up amid management's service and product focus. The company has laid the groundwork for international markets with its expansion into Norway. Its battery-swapping model is a hit with users.

To make its premium-priced models affordable to users, the company has come up with innovative service offerings such as battery-as-a-service and driver-assistance-as-a-service.

The Final Word: Tesla's trajectory in the near- to medium-term will largely depend upon how effectively it can keep rivals at bay and continue to outsell them, and seek margin improvement.

Related Link: Tesla Vs. Nio Vs. XPeng Vs. Li Auto: How EV Regulatory Credits In China Stack Up

Photo courtesy of Tesla.