With Chinese electric vehicle stocks selling off since late November, some may see opportunity with Xpeng (NYSE:XPEV) stock. But, despite the recent 35% pullback, further moves lower could be in the cards.
Sure, investor enthusiasm for this and other China EV plays is slowing down. But, what if it’s just taking a breather? Megatrends remain on its side. To many, saying this sector has peaked may seem a bit foolish.
Yet, there are signs that the tremendous growth seen in China’s EV market in 2020 could continue to fade going forward. Coupled with factors that could further diminish investor interest in Chinese EV plays, as well as negative factors specific to this stock, there could be more downside in store as we enter 2021.
So, what’s the call? Don’t “buy the dip.” Instead of shrewdly buying on a pullback, you could be just trying to catch a falling knife.
XPEV Stock and the ‘Fab Four’
Much of Xpeng’s strong stock performance was due to the overall bubble in EV stocks. But, you can’t chalk up all of its success to speculation. Just like with its peer, Nio (NYSE:NIO), surging sales played a major role as well.
Deliveries from January to November 2020 were up 87% year-over-year (YOY). November deliveries alone were up a staggering 342% from the prior year’s month. Given the strong overall strength in China EV auto sales (EV and hybrid sales in China more than doubled YOY in November), it’s no surprise this company’s G3 SUV and P7 sedan model are flying off the assembly line, and into the hands of consumers.
But, can the blockbuster demand continue? Bulls on this stock, like Deutsche Bank’s Edison Yu, seem to think so. The sell-side analyst recently initiated coverage on XPEV stock. Assigning shares a “buy” rating, and a $58 per share price target, Yu considers this part of what he calls China’s “Fab Four” electric automakers.
Who are the other three? Nio, Li Auto (NASDAQ:LI), and WM Motor Technology Group. Thanks to their ties to Chinese tech companies and local governments, this group of EV makers (in Yu’s view) are “destined to conquer the Chinese auto market,” along with U.S.-based Tesla (NASDAQ:TSLA).
Yes, the “Fab Four” seem to have all the ingredients in place for continued success in the 2020s. But, there are many factors on the table that could disrupt this. Coupled with other red flags, and there’s a good chance this “Fab Four” component heads lower in the coming year.
Why China EV Stocks Could Reverse in 2021
As Barron’s discussed in a recent article, it may be time to unplug from China EV stocks. Why? Many reasons. But, you can separate them into two categories.
Firstly, concerns about the underlying market. Competition is heating up, with not only EV upstarts but incumbent automakers entering the space. Meanwhile, subsidies are coming down. After extending them due to Covid-19, China is set to begin reducing them over the next few years.
Secondly, concerns about the market for China EV stocks, namely valuation. Sure, valuation concerns haven’t made much of an impact so far for stocks in this sector. As long as the market’s mantra remains “growth at any price,” it’s tough to build a bear case on frothy multiples alone. However, vaccine progress may bring this an end. As we inch back to the “old normal,” investors could continue to rotate out of hot sectors like EVs, and more into sectors hard hit by the outbreak.
On top of this are specific concerns with XPEV stock. As InvestorPlace’s Chris Lau discussed Dec. 17, the company’s $2.2 billion secondary offering put downward pressure on shares. Given it’s not expected to be profitable until 2023, additional dilutive stock offerings could be on the horizon, as it tries to scale into a multi-billion dollar company.
In addition, like with Nio, investors are pricing this stock based on the prospects of triple-digit percentage growth. With Xpeng, sales are expected to soar around 155% next year. The aforementioned concerns about the Chinese EV market (rising competition, falling subsidies) could result in the company falling to meet these projections.
As Investing Trends Cool, Skip Xpeng for Now
Sure, while China EV stocks cooled in recent weeks, the megatrends behind this sector remain in motion. With off-the-charts projected growth, it seems unwise to go against the grain. But, things could change in the coming 12 months.
Between factors impacting the underlying market (and Xpeng’s potential sales growth), coupled with the prospect of investors cycling out of EV stocks, and into another sector, the risk of shares falling further exceeds the potential for short-term gains from today’s prices.
Bottom line: Skip out on XPEV stock for now, as one of 2020’s hottest sectors (EVs) may not be as hot in 2021.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
