Whenever euphoria takes over on the stock market, investors ignore all risks that previously held a stock back. Xpeng (NYSE:XPEV) could have stayed in the $20 zone after its initial public offering in late August. By November, news that the S&P 500 would include Tesla (NASDAQ:TSLA) on the index caused a frenzy in buying and XPEV stock was on the move.
XPEV stock peaked at $74.49 intraday at the height of the electric vehicle bubble. Admittedly, the EV is not officially a bubble that popped just yet. For instance, the stock rose in the last few trading days, albeit on low volume.
If Chinese EV stocks keep falling, the media will still label it as an EV bubble that is popping. That is more sensational.
XPEV Stock Under Pressure
Tesla and SpaceX CEO Elon Musk accused Xpeng of stealing its old source codes. If it is true and the company loses its case in court, Xpeng is unlikely to pay much of a fine or face any restrictions.
Unless the U.S. government steps in to enforce intellectual property law, investors will keep buying Xpeng.
On Dec. 9, strong demand for its stock issuance allowed it to price a follow-on of its American Depositary Shares (“ADR”).
The $45 price tag put downward pressure on shares when it was trading at closer to $50. Including the 7.2 million additional shares, the sale will raise a whopping $2.2 billion for the company.
Xpeng used boilerplate phrases to explain the use of the net proceeds. It said it would use the cash for research and development of its Smart EVs. Second, it will expand its sales and service channels, as well as its supercharging network.
Xpeng offers a generous 50% supercharging discount to customers. The network will increase the overall range and practicality of the EV. Still, the company must compete with Nio and its battery-swapping approach. Nio’s one millionth battery swap milestone is an accomplishment. Customers need not wait for the EV to charge. The convenience will pressure Xpeng’s supercharging network.
Xpeng also said the cash from the stock sale will enable it to make potential strategic investments in core technologies. Furthermore, general corporate purposes, such as working capital needs, are vague. Markets are slowly selling Xpeng’s stock, seeking other hyper-active stocks. In the last week, momentum investors may have moved on to hot initial public offerings like Airbnb (NASDAQ:ABNB).
In November, Xpeng posted deliveries of 4,224 units, up over three-fold from last year. For the year-to-date 2020, it delivered 21,341, 87% higher than last year. Admittedly, Xpeng’s P7 is attractive. It has curvy contours on the outside. The software is even more impressive. Xpilot 3.0 delivers advanced driver assistance. The Xmart OS offers an intelligent in-car system for customers. And the 706 kilometers (439 miles) in the range is excellent.
Xpeng delivered 2,732 P7s in the month. Its G3 delivery topped 1,492. The smart compact SUV will probably not outsell its smart sedan, since Chinese customers prefer smaller vehicles. Conversely, Tesla’s Model Y and Model X are roomy SUVs that North American customers prefer over sedans.
Six of the seven analysts rate Xpeng as a “buy.” The price target of $40.67 (per Tipranks) suggests that the stock is trading at above its fair value. Investors should not ignore the low quality score of 14/100.
As shown in the chart, XPeng’s growth score is only 5/100, compared to 75/100 for Nio.
Traders need to look out for buying momentum slowing further. If the stock fails to end its downtrend, then it may re-visit the pre-breakout lows in the $20. Unfortunately, Xpeng benefited from the hype in EV stocks led by Tesla.
That catalyst is gone.
The Bottom Line on XPEV Stock
The Chinese EV firm must post exceptionally strong deliveries in the next quarter and throughout 2021. It must also demonstrate its expansion plans will lower expenses relative to revenue. Investors will demand that the company posts profits by next year.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.