Is XPEV Still A Good Investment After Surging 55% YTD?

Is XPEV Still A Good Investment After Surging 55% YTD?

Overview 

  • XPeng Inc. is in a strong financial position with total assets exceeding total liabilities by CNY 19.72 billion ($3.01 billion). The company has a stable cash runway (for at least three years based on current free cash flow), despite being unprofitable. 
  • According to XPEV’s current PB ratio of 11.2, there is a hint of overvaluation of the stock, especially compared to the US regular auto industry’s 8.6 PB ratio. However, the overvaluation might not be entirely true based on the average PB of the EV market. Being a new industry, the volatility in the EV market is higher than it would be in established industries like the regular automotive industry. If observed from this perspective, XPEV may not be even close to an overbought value.
  • The EV market is just turning its first corner in its history, and investors may tend to overvalue industry stocks. The same happened with internet stocks in 1999-2000, which culminated in the dot.com bubble. However, XPEV’s fundamentals are strong, and they offer comforting assurances for a better future for the stock’s value. 

XPeng is part of an EV revolution, and its stock deserves to be in your portfolio

For the third quarter, the latest financial report ended September 30th – XPeng recorded vehicle deliveries reaching 8,578. Compared to the same quarter the previous year, the company registered a vehicle delivery increase of 265.8% in the latest figures. The figures are still higher when looked at based on Q2 2020. From Q2 2020’s perspective, the Q3 2020 vehicle delivery figures represent a 165.7% growth. 

XPeng’s best performing product is the model P7 electric vehicle. In Q2 2020, the company sold a mere 325 P7s, which is why the 6,210 figure for Q3 2020 is hair-raising. The company also announced a further expansion of stores and service centers in major markets. As of Q3 2020, XPeng had its supercharging stations in 50 cities across China and the United States. XPeng’s efforts are already bearing fruit as the company is the leading Electric Vehicle (EV) brand in China by units sold. 

The EV industry is redefining mobility. Many reputable analysts concur that the future of mobility is electric. Statistically, the industry looks like it is destined for humongous growth in the not-so-distant future. According to data by the Jefferies Future of Mobility Index, EVs are taking the world by storm. 

In 2015, the EV sector was a nonstarter industry. At the time, the Jefferies Future of Mobility Index’s performance was inferior to the MSCI All Country World Index (MSCI ACWI). Five years later, the Jefferies Future of Mobility Index is worth more than double the MSCI ACWI – as Figure 1 confirms.

Performance of Jefferies Future of Mobility Index vs. MSCI ACWI, from June 5th, 2015 to December 1st, 2020

Figure 1: Performance of Jefferies Future of Mobility Index vs. MSCI ACWI, from June 5th, 2015 to December 1st, 2020.

But why does XPEV deserve to be in your portfolio? XPeng Inc. debuted their American Depositary Receipts (ADRs) on the NYSE in late August. Since then, the stock has surged more than 35,000%. With a total shift towards renewable energy sources imminent, EV stocks still have plenty of room to expand. 

A look at XPeng Inc.

XPeng is one of the latest giants in the EV sector to arise from China. The company commands an entire development chain for smart electric vehicles from designs to marketing. XPeng’s vehicle models and smart technology appeal to a growing section of tech-savvy Chinese and US consumers. 

Model P7 is XPeng’s best performing flagship smart EV, especially since it began to support XPILOT 2.5 and XPILOT 3.0. The model alongside XPeng’s other products drives a Smart EV transformation that is slowly shaping the future’s mobility experience. 

XPeng is a full-stack Smart EV company that develops all of its smart vehicle technologies and hardware in-house. The company’s primary office is in Guangzhou, China. Other significant China-based offices are in Shanghai and Beijing, while offices in San Diego and Silicon Valley house XPeng’s US-based staff.

XPeng boasts a strong fundamental footing

XPEV’s latest uptick arises from exceptional Q3 performance. Since the Q3 report cannot guarantee the stock’s continuous growth, one begins to wonder if XPEV’s future has remained bright. For starters, XPeng expects to deliver at least 10,000 during the fourth quarter. Although the number of units will be significantly lower than Tesla’s – a major competitor – capacity, it represents a significant leap towards a higher valuation. 

Several indicators, primarily the PB ratio, are flashing overbought signals at the moment. However, the picture suddenly changes when one considers XPeng’s strong fundamentals. 

According to the Q3 2020 financial statement, XPeng grew its revenue by 342.5% to $293.1 million compared to the same quarter the previous year. More than 95% of this revenue came from vehicle sales. Interestingly, XPeng was able to turn around the vehicle margin in Q3 2020 to a gross profit of 3.2%, as opposed to a gross loss of 10.8% in the same quarter in 2019. 

In light of the performance, the company’s CEO and Chairman Mr. He Xiaopeng said, “In our first quarter as a public company we achieved strong operating and financial results, highlighted by the rapid growth in deliveries of our P7 Smart EV.”

The technicals also support XPEV’s growth narrative

XPEV is barely four months on the NYSE, making it difficult to make out useful patterns on the price chart. However, there is more we can learn from the stock’s price action so far. 

Figure 2 below shows a 4-hour XPEV price chart with a 12-day exponential moving average (EMA 12, blue line) and EMA 20 (brown line). Between August and November, XPEV’s price action was mostly quiet. However, investors suddenly lunged at the stock after the Q3 report came out, leading to the price peaking at $72.23 in late November.

XPEV 4-hour Price Chart

Figure 2: XPEV 4-hour Price Chart

Although the price action seems to have weakened in strength after peaking, the EMA indicates the market is about to return to a positive trajectory. A complete turnaround to a strong uptrend is likely to stem from investor sentiment about the future of XPEV. 

Since XPEV expects unit deliveries to top 10,000 in the fourth quarter, there is a possibility that the company’s revenue will grow at a higher rate than was recorded in Q3 2020. Therefore, it follows that XPeng could continue to record lower and lower net loss, and perhaps the company might turn profitable soon. If this happens, the latest golden cross of the 12-day and 20-day EMAs in Figure 2 could signal a coming record-shattering growth of XPEV stock. 

Conclusion

It is not difficult to see why investors are having doubts about XPEV stock at the moment. First, the company is unprofitable and, secondly, the stock is hyper-volatile. However, one sees a different picture after considering the company’s fundamentals. XPeng has a strong financial position and expects massive growth in unit sales in the future quarters.

From a technical perspective, XPEV is just beginning its journey towards higher valuations. Put together, the overall view of XPEV is a stock that has huge potential to break past the peak set in November. Therefore, the stock is a BUY.

Ruchi Gupta

Ruchi is a freelance contributor and analyst to FXAudit.com. Ruchi holds an MBA in Finance. She focuses on financial markets, politics, and technology. Focus: Equities and Forex

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