XPeng (NASDAQ:XPEV) is up over 111% since its initial public offering in August. There may be a reason to get excited about XPEV stock.
However, investors should remember that right now any stock that has anything to do with electric vehicles (EVs) is having a good year.
How hot is the electric vehicle (EV) segment? Tesla (NASDAQ:TSLA) is up 625% this year. Nio (NYSE:NIO) is up 1,028% and Li Auto (NASDAQ:LI) is up about 100%. All of a sudden, XPeng doesn’t look that special.
Simply put, the EV market is in a bit of a bubble. And things have worked out well for anyone who took a flier on XPEV stock.
However the thing about bubbles is that they burst at some point. So the question to consider when taking a position in XPeng stock may be not if, but when?
A Closer Look at XPEV Stock
The surge in electric vehicle stocks bears caution. There’s no question that the sector is no longer about hype. Morgan Stanley (NYSE:MS) just issued a prediction that global EV sales will increase by 50% in 2021.
The analysts are also increasing their outlook for global EV penetration. They now believe that it could rise by an additional 4% from prior estimates, reaching 31% by 2030.
The research firm Markets and Markets projects the smart EV market to grow at a compound annual growth rate of 32% between through 2022.
But the rosy projections about EV sales seem to be missing the fact that we’re still dealing with a global pandemic. In the U.S. we’re hearing that it’s going to be a dark winter. We are being told that even with the emergence and approval of vaccines, Covid-19 will act as a brake on the world economy until well into 2021.
And let’s not forget that millions of Americans are out of work and have no business to go back to.
But the bullish message for electric vehicles suggests that the story is different in China. And it would have to be for it not to impact XPeng. The company does not sell outside of China right now.
However in the prospectus that XPeng issued in its Dec. 11 public share offering, the company admitted that Covid-19 still represented a risk factor.
In fact, the prospectus contained a rather large section on risk factors. I know much of it is boilerplate information that the company is required to disclose. But sometimes it’s good that regulators make companies say the quiet parts out loud.
And the quiet part for XPeng is that it’s a young company that faces formidable competition in the electric vehicle sector. It will face challenges as it ramps up its production while continuing to focus on innovation. All of which means profit is likely to be at least a few years away.
XPEV Stock Should Rise Because…Why Not?
I’m not going to debate Mark Hake’s math. Hake sees significant upside for the stock. In a recent article, Hake writes, “XPEV stock will be worth about $72 in one year from now, up 46%, assuming its revenue growth rate continues to move exponentially higher.”
And to support Hake’s analysis, after an initial sell-off, the market is largely shrugging off XPeng’s recent share offering. I get joining the race for cash. But XPeng may need it more than others.
Nor will I question Will Ashworth’s optimism who believes in the long run, XPeng may be a better bet than Nio. In fact, if I were forced to invest in XPEV stock, I’d probably take Ashworth’s advice. That is to take a small position now, and look to buy on dips over the next 18 months.
The Bottom Line on XPeng Stock
It appears that the Chinese EV market is back on track. And even though XPeng is late to the party, it looks like it’s going to stick around. So do the five analysts that have issued a rating on the company’s stock.
They give it a price target of $53.24. That would be an attractive 20% increase from the stock’s level of around $44 as of this writing.
I know that you have to get in on growth stocks before they hit the inflection point. I’m just not convinced we’re there yet with XPEV stock.
I’d like to see a quarter or two of earnings reports. But that’s me. XPeng has potential where others are proven. If that’s a story that you can buy into than I’d advise you to watch the road signs. There could be a dip ahead.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.