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The Dip in Xpeng Is a Chance to Buy a Multi-Bagger

Xpeng (NYSE:XPEV) stock shot up after the Chinese electric-vehicle maker entered the European auto market with an initial batch of 100 G3 SUV deliveries to Norway.

Xpeng logo and P7 model in store XPEV stock
Source: Andy Feng / Shutterstock.com

It marks the first time that Chinese-made smart EVs will be directly delivered to individual customers in Europe, laying down a major challenge for Elon Musk’s Tesla (NASDAQ:TSLA), which so far had to contend with Volkswagen (OTCMKTS:VLKAF) on the continent for European BEV bragging rights.

Then why is XPEV stock down 12.8% in the space of a month? It has to do with several things, some under the company’s control and some not.

President Donald Trump signed a bill calling for foreign companies’ delisting that doesn’t adhere to the same accounting transparency standards that securities regulators impose on public U.S. firms. The bill drew rare bipartisan support in Congress before Trump signed it into law.

Separately, the electric vehicle maker has chosen to make hay while the sun shines. Xpeng raised $2.16 billion from selling 48 million American depositary shares at $45 apiece, cashing in on the rally in electric car shares. Markets didn’t react favorably to the move, and understandably so.

Finally, there is the issue of valuation. Although shares have lost steam, they are still trading at 60x price-sales. At this point, investors have become used to such high multiples in the space. But the gap between the price target and fundamental-value estimate is cause for concern.

Despite all this, XPEV stock remains a good investment. Margins and deliveries continue to improve at a healthy clip, it’s working on innovative autonomous driving concepts, and management is rock solid. I advocate adding shares of the Chinese EV manufacturer each time there is a dip in stock price.

XPEV Stock Is Positioned Well

It can become confusing navigating the EV space right now. There are so many options to choose from that it can get a bit dizzying. Several EV companies are entering the market with each passing day, hoping to be the next Tesla. The most notable has to be three Chinese EV companies – Nio (NYSE:NIO), XPeng, and Li Auto (NASDAQ:LI).

Of them, NIO is the most prominent player. Backed by Tencent (OTCMKTS:TCEHY), JD.com (OTCMKTS:JDCMF), and Baidu (NASDAQ:BIDU), the Shanghai-based manufacturer, is having a great year, much like its more famous American counterpart. It delivered 5,291 vehicles in November, representing 109.3% year-over-year growth and a new monthly record. In the year thus far, NIO delivered 36,721 vehicles, a rise of 111.1% year-over-year.

XPeng is not far behind. It delivered 4,224 vehicles in November, a 342% increase year-over-year. Total deliveries amount to 21,341 vehicles year-to-date 2020, an 87% jump year-over-year.

It reported bullish sales guidance and improved gross profit margins, though it lost $169.2 million for the quarter, slightly more than in the second quarter. The higher loss is attributable to higher spending on R&D for autonomous driving and other innovations.

Overall, the earnings report was a positive one. However, short sellers continue to bet against the stock. Meanwhile, Xpeng, which went public in the U.S. in August at $15 a share and has reached $45, continues to be overvalued.

Short-Term Headwinds and Fundamental Long-Term Change

Despite the positive earnings report and strong sales numbers, several investors have legitimate concerns surrounding Xpeng. At the moment, the biggest concern has to be the new legislation that could remove Chinese companies from U.S. exchanges if American regulators are not allowed to review their financial audits.

The Holding Foreign Companies Accountable Act will expect corporations to establish that they are not owned or controlled by a foreign government and allow the U.S. Public Accounting Oversight Board to review their financial audits. This sets the stage for delisting Chinese companies on U.S. exchanges, including XPeng, and Li Auto. Nio believes it complies with the new requirements.

The bill should be seen against the backdrop of the broader China-U.S. trade war and the accounting scandal that put Luckin Coffee (OTCMKTS:LKNCY) out of commission.

Plus, there are larger, more systemic issues that should concern investors. Chinese state subsidies are falling and could expire, just as competition ramps up in the world’s biggest EV market.

You also have to factor in that the novel coronavirus pandemic, which battered consumer cyclical stocks, will eventually recede to the background. Vaccines are rolling out, and soon you will see businesses finally start to whir again. Naturally, these companies will start to get some more love looking forward.

Buy the Dip

I understand the skepticism surrounding XPEV stock. The company is operating in the mid-end market segment. Xpeng will have to keep innovating to provide the consumer with more options and compete with its rivals’ catalog. The subsidies provided by the local Chinese states are falling and could expire. And as a Chinese firm, Xpeng will remain subject to the frothy relations between Beijing and Washington.

However, if you look at the fundamentals and the story backing Xpeng, then you will understand why I am bullish on this one. Xpeng’s CEO and founder, Xiaopeng He, has selected a management crew comprising eminent professionals from ZTE (OTCMKTKS:ZTCOY), TEsla, JPMorgan (NYSE:JPM), and Volkswagen. Large conglomerates are backing it with deep pockets.

Valuation is undoubtedly an issue. Shares are still trading at a discount to the larger players, Tesla and Nio. Plus, even if relations with the U.S. sour, Xpeng has a robust domestic market that it will continue to tap.

President Xi Jinping is hoping China will achieve carbon neutrality by 2060. The shift to “new-energy” vehicles – electric, plug-in hybrid, or fuel cell-powered – is part of this strategy. This is a secular tailwind in China that is not going anywhere.

That’s why I will advocate adding XPEV stock to your portfolio whenever it loses steam. Buy the dip whenever the opportunity presents itself.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.


Article printed from InvestorPlace Media, https://investorplace.com/2020/12/the-dip-in-xpev-stock-is-a-chance-to-buy-a-multi-bagger/.

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