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Wait for a Pullback Before Jumping on the XPeng Bandwagon

Guangzhou-based EV manufacturer XPeng (NYSE:XPEV) is perhaps the most successful of this latest EV crop with XPEV stock rising 123% since its IPO back in August.

Image of Xpeng's (XPEV) G3 electric SUV outside a mall in China

Source: Johnnie Rik / Shutterstock.com

Electric vehicle stocks seem to have turned a corner this year as the sector is enjoying its best year yet. Chinese EV makers, in particular, have made headlines this year for their parabolic rise in the U.S. stock markets.

On the back of its recent stellar third-quarter results and favorable coverage from analysts, the XPeng stock rose 170% in November. However, valuation remains a concern, and you should wait for a pull-back for making your move.

XPeng continues to pile on the cash after its hugely successful IPO in August. The company raised $1.72 billion from its IPO, pricing its stock above the range.

It followed that up with an upsized share sale of $2.16 billion. The follow-on offering is the second biggest for a US-listed Chinese firm. The company aims to invest additional funds for research and development to improve its product portfolio.

Strong Third Quarter for XPEV Stock

XPeng recently reported its solid third quarters. Total revenues increased by a whopping 342.5% year-over-year and by 236.9% from the previous quarter.

Moreover, gross margins improved to 4.6%, from a negative 10.1% in the prior-year quarter. Vehicle deliveries for the third quarter increased by an incredible 265.8% to 8,578. Deliveries of its flagship P7 were at 6,210, which dwarfed the 325 deliveries in the previous quarter.

However, the results were not enough to profit the company as it posted a net loss of $169.2 million in the period. With such a healthy run rate, you’d expect XPeng to soon turn a profit, provided it manages its operational expenses and R&D costs.

The company’s liquidity position looks mighty impressive at this point. It ended the quarter with roughly $2.94 billion in cash. As mentioned, before it raised another $2.16 billion from its follow-up stock sale, which should further beef up its cash till.

China is pushing for 20% of its car sales to be an EV by 2025. Hence, the addressable market for XPeng is set to grow exponentially in the coming years.

It recently announced the development of a new facility with Guangzhou GET Investment Holdings. Therefore, It will be looking to ramp up production to cater to its EVs’ rising demand.

XPeng’s Potential

XPeng aims to become a smart EV company focusing on innovation. Its cars offer high performance with an attractive design, along with safety and reliability.

The company launched its first car SUV G3 back in 2018, with a starting price of CNY 147,000 and a range of 520 km. This year it released its P7 sedan with a starting price of CNY 147,000 and a range of 562 km.

The car is loaded with several high-tech features and a streamlined design that mimics Tesla’s (NASDAQ:TSLA) Model 3. Both cars target the mid-to-high-end price market, which is China’s largest sub-segment for EV consumption.

R&D remains a big part of its future success. It aims to become self-reliant and is pouring in heaps of cash for its innovation push. In the past 12 months, it has spent 53% of its revenues on R&D. However, and there is a risk that the company might fail in monetizing R&D endeavors. This is likely to hurt its financials in the near term.

However, its valuation at this time is extremely high. Its enterprise value to forward sales figures is at 37.9, roughly 2,446.22% higher than the sector median.

Additionally, its forward price to sales ratio is at 40.6, which is again 3,286.05% higher than the sector median. XPEV stock has dipped a fair bit in the past month, but it is still priced incredibly high despite the drop.

Bottom Line on XPEV Stock

XPeng is undoubtedly among the top Chinese EV players who could give Tesla a run for its money. It has truckloads of cash and continues to pour in money in improving the quality of its final products.

Its third-quarter results were stellar, and from the looks of its things will only get better in the upcoming quarter. However, its valuation is a concern, and the recent dip provides hope that it could trade at a fairer price soon.

On the date of publication, Muslim 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/wait-for-a-pullback-before-jumping-on-the-xpev-stock-bandwagon/.

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