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Why Everyone Loving Xpeng Stock Is Also the Reason for Caution

Like many electric vehicle firms, Xpeng (NYSE:XPEV) is off to an auspicious start for the new year. Since the beginning of January, shares are up 17%, which is right in line with other Chinese EV makers like Nio (NYSE:NIO), up 16% over the same period. But it’s not just technical sentiment begetting FOMO (fear of missing out) that’s driving Xpeng stock.

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

Fundamentally, it appears that major international institutions are also catching electric vehicle fever. According to a recent Reuters report, XPEV “secured a credit line of 12.8 billion yuan ($2 billion) from five Chinese banks to expand manufacturing and sales.” Management stated that this will “diversify its funding channels,” with the company planning on building a third car plant in China.

On the surface, this is brilliant news for Xpeng stock. First, the underlying company is plying its trade in the world’s biggest automotive market. This should keep XPEV’s team busy for a good long time. Second, management has wider ambitions, and Xpeng has made good on them. Last month, it delivered its first shipment of its G3 smart electric SUV to Norway.

Superficially, this represents a shot across the bow to European automakers, indicating Xpeng’s intent to expand into this critical market. But look a little deeper and Norway is really a benchmark for gauging EV success. According to CNN, battery electric vehicles “accounted for more than half of all cars sold” there in 2020.

Of significant note is that Volkswagen (OTCMKTS:VWAGY) unseated Tesla (NASDAQ:TSLA) as Norway’s top auto sales maker. Because the Scandinavian country has embraced the carbon-free lifestyle, what customers prefer over there could have implications for the rest of the world as they play catchup. Thus, XPEV focusing its international strategy in Norway is smart and seemingly bodes well for Xpeng stock.

So, does XPEV have the green light?

EV Craze Might Cool for Xpeng Stock and Others

If you look around the blogosphere, you will find very few objections to the advancement of the EV. Post after post after endless post have ardently endorsed the supremacy of the electric platform over the dirty internal combustion engine. And this again superficially supports the case of Xpeng stock.

But you got to wonder – with seemingly everyone going EV crazy, is the ramp up in valuation of these “electrifying” companies sustainable? At the risk of having my inbox bombarded with hate mail, I must express some skepticism.

First, I love the Norwegian people. But their distinct attributes, such as politics, cultural and demographic homogeneity, geographic characteristics, and other factors make the Norwegian benchmark concept less applicable to other nations.

Second, Xpeng stock, while buoyed by the line of credit announcement, faces fierce competitive risks. Ironically, this may have something to do with China’s failure to create combustion cars that could dominate its own home market. The Economist argued that Chinese cars lacked the refinement and quality that consumers had come to expect:

A car, and especially its engine, is something much finer, its pistons and valves continuously dancing, the string of explosions in each cylinder perfectly timed, the amount of torque transferred through the crankshaft to the wheels just what the driver expects, all of it owned by someone who wants to devote as little time to maintaining this mechanical miracle as possible—ideally, none.

On the flipside, EVs are easier to manufacture in large part because of their fewer moving parts. However, that lowered barrier of entry means that other companies can come in and compete. At some point, without much distinction, you really can’t compete on anything other than price.

And this segues into my third point: a race to the bottom may not serve anyone any good. Additionally, it can tempt corner-cutting, something that Chinese companies are very familiar with. For example, Reuters wrote a piece in 2019 which detailed how consumers were unhappy about how their Nios and other Chinese EVs performed against their marketed specs.

Can the Government Sustain EVs?

In 2008, then-President Barack Obama thought he saw the writing on the wall. As gas prices neared an average of $4 per gallon, he set a goal of selling one million plug-in electric vehicles by 2015.

However, he didn’t quite get there. By the end of 2015, only 400,000 electric cars have been sold. True, there’s been a ramp up in sales, thanks mostly to Tesla. But even Tesla’s business has to be examined in a holistic sense.

While TSLA is obviously killing it in the market, the company sells each car at a loss. However, it’s showing profit on the books because Tesla sells carbon credits to other manufacturers who would otherwise risk paying steep government-imposed penalties.

But here again is another question I’d like you to think about – what if the government wasn’t involved in EVs? You know, free market capitalism and all that jazz. Without carbon credits, subsidies and some virtue signaling, it appears that customers prefer combustion cars.

That might change because EVs will get cheaper due to lower battery costs. But you also can’t discount the possibility that combustion cars might also get cheaper and more efficient due to advanced technologies and superior economies of scale.

I mean, we have to be fair right? You can’t just assume that one platform will receive all the improvements and the other will just stay static. That’s not how this works.

Those are big picture questions for Xpeng stock. But XPEV also has the Chinese competition equation, which ultimately makes me hesitant.

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

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

Article printed from InvestorPlace Media, https://investorplace.com/2021/01/everyone-loving-xpeng-stock-is-a-warning/.

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