As we finish a year like no other, the Xpeng (NYSE:XPEV) story has generally been a good one. Up 153% since its initial public offering in August at $15 a share, XPEV stock fell by almost 30% in November and is down 35% in the final month of the year through Dec. 28.
It appears that the thrill is gone from the Chinese electric-vehicle maker’s growth story.
So, the question for IPO shareholders after December’s selloff is whether it’s time to sell or not?
I believe it’s a buy-on-the-dip kind of moment, but let’s have a look at both sides of the argument to be safe.
XPEV Stock Is a Buy at $42 or Lower
In my last article in late November, I called XPEV stock a long-term buy.
“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,” I wrote on Nov. 29.
“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.”
At the time of my article, it had already started its fall from greatness trading at $64 and change, well below its 52-week high of $74.49, hit just a few days earlier.
When I suggested holding off on a full position because investors might buy below $50, I had no idea the opportunity would come so soon. Now trading around $42 and in a bit of a freefall, it’s clear investor appetite for Chinese EV stocks has diminished significantly.
However, if you bought at $15 and are still holding, I think the November delivery numbers should give you the confidence to hold steady.
Xpeng delivered 4,224 vehicles in November, 342% higher than in the same period a year earlier, and 39% higher than its 3,040 deliveries in October. Through the first 11 months of the year, it’s delivered 21,341 vehicles, 87% higher than last year through November.
The company stated in mid-November that it expects to deliver 10,000 vehicles in the fourth quarter. If it hits that, it will have delivered 31,341 vehicles in 2020, 146% higher than the 12,728 vehicles it delivered in 2019.
I don’t know about you, but those don’t seem like terribly poor year-over-year and sequential comparisons. And yet, investors seem to be getting all negative about the Xpeng story. I don’t see it.
Deutsche Bank analyst Edison Yu initiated coverage of Xpeng in mid-December, giving it a buy rating and a $58 12-month price target. That’s 38% upside from where it’s currently trading.
If you’ve never owned XPEV stock, buying in the low $40s or even the $30s ought to reap dividends over the long haul. But expect volatility as it continues to grow its business.
Xpeng Shareholders Will Feel More Pain in 2021
There is no question XPEV is an expensive stock. When I wrote about it, it was trading around 72 times sales. With the pullback, it’s trading around 56 times sales. You can buy Nio for 26 times sales, less than half Xpeng’s multiple.
So, if you’re considering XPEV and you only want to own one Chinese EV play, you might want to consider NIO seriously. I like them both but Nio’s definitely farther along the pathway to profitability.
InvestorPlace’s Josh Enomoto believes Xpeng has some serious question marks. The biggest being that its vehicles are carbon copies of Tesla (NASDAQ:TSLA), bringing a possible lawsuit that Xpeng can’t possibly win.
“Xpeng is a carbon copy of Tesla. Further, Tesla has already cried foul that Xpeng stole its Autopilot source code by hiring a former Tesla engineer that downloaded the code to his personal device,” Josh stated on Dec. 27.
“As Electrek points out, Xpeng until recently was tied exclusively to the Chinese automotive market. Therefore, enforcing intellectual property rights was going to be extremely difficult. That said, Xpeng has started to deliver vehicles to Norway under plans for a broader European expansion.”
My colleague’s argument suggests that once Xpeng moves its business beyond China’s borders, it will face serious intellectual property lawsuits from companies such as Tesla, making it virtually impossible to grow beyond the domestic market.
Is that the reason XPEV has lost altitude in December? I don’t believe so.
A combination of valuation and its secondary offering were primarily to blame for the correction.
When it comes to valuation, Daiwa analyst Kevin Lau also initiated coverage of Xpeng in mid-December. Only, in this instance, Lau gave it a sell rating and a $32 price target.
The analyst believes the stock is overpriced due to China’s competition getting more difficult by the day, including Tesla’s Model Y.
Further, it closed its follow-on offering on Dec. 11 that saw the EV maker sell 55.2 million American Depositary Shares (ADSs) at $45 per share. The underwriters exercised their option to buy an additional 7.2 million shares.
The gross proceeds of $2.5 billion will be used for research and development, sales and marketing, potential technology investments, and general corporate purposes.
The problem with the secondary offering is that it suggests to investors that XPEV is worth $45 and not the $75 price tag where it traded in late November.
The Bottom Line
If you’re thinking about buying XPEV, it’s time to fish or cut bait.
I don’t believe the thrill is gone from Xpeng’s growth story, so I continue to believe 2021 will be good to XPEV shareholders. That said, you should not be buying its stock if you can’t stand the risk.
However, if you’re an aggressive investor, this is buy-on-the-dip territory.
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.