Since Xpeng (NYSE:XPEV) reported its third-quarter results on Nov. 12, its first as a public company, XPEV stock has gained nearly 44% through Nov. 27. As crazy as it sounds, I see it as an excellent long-term buy despite the two-week liftoff.
There’s No Question XPEV Stock Is Expensive
I’m not even going to try to convince you that XPEV is growth-at-a-reasonable-price because it’s not. Trading at 72 times sales, about four times Tesla’s (NASDAQ:TSLA) price-to-sales ratio and 44 times Nio’s (NYSE:NIO), it’s E-X-P-E-N-S-I-V-E with a capital E.
That said, I recommended Xpeng back in September because there was a lot to like about the EV company.
“You’ll notice there’s no debt reduction mentioned. That’s because it only has less than $300 million in short- and long-term debt backed up by $3.6 billion in total assets, including the $2.5 billion in cash from the IPO,” I wrote on Sep. 8.
“In the first six months of the year, it had sales of $141.9 million and an operating loss of $202.2 million. That’s down 26% from a year earlier.”
Essentially, I felt that Xpeng would follow the same pathway to profitability that Nio’s on, making it an excellent buy. It’s up 228% since. Crazy as it sounds, that might be the tip of the iceberg.
Its Latest Numbers
Xpeng president Brian Gu told Barron’s shortly after delivering its Q3 2020 results that he too was surprised about its surging share price.
“‘To be honest, no one escapes looking at the stock screen,’ Gu told Barron’s. “But ‘we don’t manage the business to the stock chart.’ He also says XPeng isn’t in a position to tap markets right now. The company just went public, selling shares in an initial public offering, in August.”
Forget sales and profits or losses for a moment and consider that it had a gross margin of 4.6% in the quarter, its first positive number in its history. That’s huge. You don’t become profitable without driving margins higher.
Nio reported its third-quarter results on Nov. 17. It had a company-wide gross-margin of 12.9% and a vehicle margin of 14.5%. And of course, its deliveries during the quarter were outstanding — 12,206 compared to 4,799 a year earlier — leading to a top-line vehicle sales of $628.4 million and a bottom-line non-GAAP operating loss of $132.1 million.
By comparison, Xpeng had a gross margin of 4.6% as mentioned earlier, a vehicle margin of 3.2%, top-line vehicle sales of $279.6 million, a bottom-line non-GAAP operating loss of $121.2 million, and deliveries of 8,578 vehicles, 265.8% higher than a year earlier and 165.7% higher than Q2 2020.
I’ll point you to two numbers to take note of in the quarter.
A More Affordable Vehicle
First, it generated $32,595 in revenue from each vehicle delivered in the quarter, compared to $51,483 per Nio vehicle. At first glance, one might consider Nio the winner in this scenario. However, if electric vehicles are to spread throughout China and elsewhere, the price must be lower for the average consumer.
While I’m fully on board with the Nio story, I like Xpeng’s relative affordability. That could help it grow even faster than Nio over the next two to four quarters.
The second is the balance sheet.
Xpeng finished the quarter with net cash of $2.38 billion while Nio ended its quarter with $1.81 billion, more than $500 million less than Xpeng.
While you could argue that Nio has less cash because it’s had to build to 12,000-plus vehicle deliveries in the quarter, about 50% more than Xpeng, you could also say that considering Xpeng saw operating expenses that increased by 155% during the quarter compared to a 30% reduction for Nio, Xpeng’s IPO came at absolutely the perfect time in its growth arch.
As a result, it might be able to keep a lid on future debt, which is very good considering no one knows where the global economy’s headed in 2021.
The Bottom Line
Xpeng expects to deliver 10,000 vehicles in the fourth quarter, 210.8% higher than last year, with revenues of $334 million. Assuming it hits its projection for Q4, the company will have delivered slightly more than 24,000 vehicles in 2020, at a time when Covid-19 affecting its ability to sell its vehicles.
The business looks ready to break out in 2021. It’s possible Xpeng could be an even better bet than Nio. I do think it’s expensive, but what often ends up happening is you wait for a better time to buy, and it never comes.
For this reason, if you’re willing to hold for three to five years, I would buy half a position today and see if you can’t fill the rest of the position below $50 in the next six to 12 months.
Until Xpeng proves otherwise, it’s a long-term buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.