The stock market has been rising at a furious pace for the past eight months, so it’s inevitable that there will be some days when investors take a break from the bull market. Yet even when markets fall, they’ve tended not to produce meaningfully sharp declines. That was the case on Friday morning, as concerns about whether an economic stimulus package will ever come out of Washington weren’t enough to produce an extended negative reaction on Wall Street. As of 11 a.m. EST, the Dow Jones Industrial Average (DJINDICES:^DJI) was down just 45 points to 29,954. The S&P 500 (SNPINDEX:^GSPC) dropped 16 points to 3,652, and the Nasdaq Composite (NASDAQINDEX:^IXIC) fell 56 points to 12,349.
One area that has captured much investor attention is electric-vehicle technology, where a huge range of new companies are all vying for supremacy. Two of the best-known are NIO (NYSE:NIO) and Tesla (NASDAQ:TSLA). Both were lower Friday morning, but for different reasons. And long-term investors don’t necessarily need to be worried about the drops.
NIO raises cash
Shares of NIO were down almost 6% Friday morning. The Chinese EV company decided that it would follow in the footsteps of Tesla and take steps to raise capital at an opportune moment.
NIO commenced a secondary stock offering in which it will sell up to 60 million American depositary shares of stock. Based on Thursday’s closing price, that would’ve raised $2.7 billion in cash, although the drop today suggests a slightly smaller final number from proceeds of the sale.
Investors often fear secondary stock offerings because they’re potentially dilutive toward future gains, but a lot depends on what the company is using the money for. NIO intends to use the proceeds primarily for research and development of new products and autonomous driving technology, as well as efforts to expand its sales and service network and boost market penetration. Those goals should promote NIO’s growth at a faster pace than would otherwise be possible, creating a net benefit for shareholders.
Often, secondary stock offerings cause a temporary drop in a high-growth stock that reverses shortly after the offering is complete. That was the case with NIO back in August, when the Chinese EV automaker sold stock around $20 per share only to see it jump above $55 by November. Investors hope the same will be true for NIO this time around.
Tesla gets another downgrade
Elsewhere in the EV industry, automaker pioneer Tesla’s stock fell almost 2%. The Elon Musk-led company is frequently the target of analyst comments, and today, one more Wall Street denizen weighed in with a mixed view, which involved a stock downgrade and a price target increase above Tesla’s current share price.
Analysts at Jefferies downgraded Tesla stock from buy to hold, which is generally seen as a negative move. However, they boosted their price target on the shares by 30% to $650 per share.
Jefferies’ views seemed to balance common criticisms of Tesla with the practical reality of the situation the automaker faces. Analysts believe that the broader auto industry is too massive and entrenched for Tesla to completely take it over, as many of the company’s most ardent proponents argue. However, the Jefferies analysts admit that the brand, which they called “messianic,” offers adjacent opportunities far beyond cars and trucks. They see Tesla’s focus on electric vehicles and the development of battery technology and autonomous driving, coupled with the company’s direct-sales model, as a lasting competitive advantage.
The big edge for Tesla, NIO, and EV
Interestingly, though, Jefferies considers the biggest advantage that Tesla, NIO, and other EV players have to be their access to almost limitless capital. For instance, Tesla recently announced plans to raise $5 billion in a stock offering. That’s something industry leaders like General Motors (NYSE:GM) simply couldn’t do.
That Tesla can command a market cap roughly 10 times that of GM is a testament to what investors want to support. That bodes well for long-term prospects for EV automaker stocks both large and small.
