Is XPeng Stock a buy or sell after strong profits? (NYSE: XPEV)
XPeng Inc. (NYSE: XPEV) is one of China’s fastest growing electric vehicle players, along with NIO (NIO), Li Auto (LI) and BYD (OTCPK:BYDDY). His two delivery histories as well as its revenue performance are very compelling, and with international expansion driving future growth, the business outlook is strong. Compared to other EV players such as Tesla (TSLA), XPeng is trading at a very undemanding valuation. That said, commodity price inflation and China-related macroeconomic risks should not be completely ignored.
XPeng Recent Revenues
XPeng Inc. released its latest quarterly results on March 28. The company was able to beat estimates on both lines:
Revenue grew an excellent 200% year-over-year to $1.3 billion, or more than $5 billion in annual run rate. The business was not profitable during the quarter, but that was expected. In fact, the XPEV net loss generated during the fourth quarter was significantly lower than analysts had predicted, reaching about half of the expected level.
The market reacted very positively to these stronger than expected results, although it should be noted that XPEV is still down over the past year as XPEV stock price had fallen significantly from recent highs. before the publication of the results.
XPEV Stock Key Indicators
During the fourth quarter, XPeng delivered 42,000 vehicles, equivalent to an annual rate of approximately 170,000 vehicles. For an electric vehicle company that is not yet profitable, performance in increasing production and delivery levels is paramount. These stocks are primarily considered growth investments, as there are no dividends and since it is not easy to assign a “value” rating due to non-existent earnings and free cash flow. XPEV performed very well on the particularly important deliveries metric.
During the fourth quarter, shipments increased 220% year over year. That’s slightly more than the company’s revenue growth over the same period. Although this results in a lower average sale price, which is usually not a positive thing, the explanation is benign. Changes in XPEV’s product lineup, such as the introduction of lower-priced models, including the P5 sedan, explain why average selling prices fell slightly from the previous year. Tesla has seen similar average selling price declines as it has expanded its product portfolio by introducing new, less expensive vehicles such as the Model 3 over time.
Looking at XPEV’s first-quarter delivery performance, it seems pretty clear that the company remains on the growth path. Deliveries during the first quarter totaled 35,000. That was down on a sequential basis, but that was already expected. Seasonal effects, including the timing of Chinese New Year holidays, play a role here. In fact, XPeng’s actual delivery performance in the first quarter was better than the company’s own forecasts and analysts’ estimates. Year-over-year (which is more telling as it takes into account seasonal effects), XPEV also saw strong growth, with shipments up 159% from Q1 2021.
In March, the most recent month, XPeng delivered 15,400 electric vehicles, representing an annual operating rate of 185,000 vehicles. This shows what the company is already capable of, although further growth can of course be expected for the rest of the year. If XPEV were also to increase deliveries during the rest of the year by 159% (the first quarter growth rate), compared to a 2021 baseline, deliveries in 2022 would total more than 250,000 vehicles that year. I think it might be too aggressive, as the growth should eventually slow down. But even if XPEV were to fall slightly below that number, it’s pretty clear that 2022 will be another strong year for the company in terms of business growth.
At some point, this business growth should translate into profit growth, of course. Without positive earnings and free cash flow, a business does not create value for its owners. But as Tesla has proven in the past, earnings growth will eventually follow when business growth remains healthy. Growing manufacturing expertise, better terms from suppliers due to higher volumes, and effects such as fixed cost digression will help increase margins over time.
We’ve already seen this in play over the past quarter. Even though XPEV has yet to generate positive net earnings, the company has managed to increase its vehicle margin from 6.8% in Q4 2020 to 10.9% in Q4 2021. Another year of growth production, operating leverage and efficiency improvements, and XPEV should be able to generate vehicle margins of around 15%. With two more years of margin expansion of more than 400 basis points, XPEV could be looking at vehicle margins in the 20% range, which would be quite attractive. Tesla broke even in 2020, a year in which the company sold half a million vehicles. If Tesla is any guide, XPEV is still at a stage where profitability is not expected, so investors shouldn’t rely too heavily on the fact that the company is not yet profitable. Instead, with continued growth, XPEV is on track to become profitable in the not-too-distant future, potentially at an earlier stage than Tesla (compared to vehicles sold at that time).
For a company that is not yet profitable, the strength of the balance sheet is obviously very important. Expansion of manufacturing capacity, R&D efforts, etc. cannot be financed by profits if there are none, so the cash positions held on the balance sheet are the source of future investments. In this regard, XPEV seems well positioned for the future. Between cash and cash equivalents, XPEV had $6.8 billion at the end of 2021. I think that will be enough to fund growth investments, R&D, etc. for the next two years. XPEV lost about $200 million in the fourth quarter. On an annualized basis, that brings us to about $800 million. Even if that number were to reach $1 billion in 2022, the current cash position would be sufficient for almost seven years. XPEV should be able to break even long before that as long as the business continues to perform well.
What is the prediction for XPeng?
XPeng is a fast growing EV player with attractive products. Its brand and vehicles are not as high-end as NIO’s, for example, but the addressable market for low-cost vehicles is very large and therefore attractive. XPEV’s P5 sedan, for example, sells for around $25,000, which is an attractive price for a well-designed electric vehicle. On top of that, the company’s products include strong autonomous vehicle technology, making them even more appealing to “techie” urban consumers who place a high value on driver assistance systems and similar technologies. . XPEV’s autonomous vehicle technology is very successful, as evidenced by the fact that the company plans to launch a robo-taxi program later this year.
XPeng should also benefit from its continued expansion in Europe. Recently, the company launched its first overseas branded store in Stockholm, Sweden. Europe is one of the largest markets for electric vehicles, and XPEV is looking to become a major market player there. With strong demand for electric vehicles, supply chain bottlenecks from many competitors resulting in long wait times for their respective products, and generous subsidies in many countries, XPEV’s prospects in Europe are pretty solid. China will of course remain the most important market in the short term, but international success will be an important growth engine for XPeng in the years to come. We’ve seen a similar trend at Tesla over the years, as entering new markets has always been accompanied by increased shipments and revenue. XPEV also has a cooperation agreement in the Netherlands, and other countries are expected to appear on XPeng’s list for the next few quarters.
We cannot assign a value based on XPEV earnings, as there is none at this time. Nonetheless, we can examine how XPEV’s valuation compares to that of its peers based on other metrics, such as the price-to-sales ratio:
On an enterprise value to revenue ratio, XPEV seems pretty inexpensive. Note that this metric accounts for differences in debt usage among competing EV players, which is why I think it is more revealing than the market cap-to-revenue ratio. XPEV is trading at a multiple of 3x sales, while its Chinese counterpart NIO is slightly more expensive. Both are trading at massive discounts to current market leader Tesla and other US-based electric vehicle stocks such as Rivian (RIVN) and Lucid (LCID). To a certain extent, this discount seems justified, for example due to regulatory uncertainties. But I don’t believe a 300% to 800% premium for US EV stocks makes sense, compared to how XPEV, NIO, etc. are evaluated. The combination of a relatively inexpensive valuation, compelling growth prospects and solid execution bodes well for XPeng, I think.
Is XPEV stock a buy, sell or hold?
The electric vehicle industry is highly competitive and faces rising commodity price pressures, such as nickel and lithium. This will be a problem for all players, however, and is therefore not an XPeng-specific threat. I think XPEV is attractively priced compared to many other players in the EV space, including large US-based players such as Rivian, Lucid and market leader Tesla. So for someone looking to buy some EV stock, XPEV is one of the best choices I believe.
That being said, some investors may prefer not to own electric vehicle stocks at all. Commodity price headwinds, growing competition, supply chain issues and a cyclical business model may be a reason some are avoiding the industry altogether – in this case, XPEV is not a buy, of cours.