XPeng (NASDAQ:XPEV) announced strong fourth-quarter and full-year 2020 earnings on March 8, along with significant growth and a positive outlook for 2021. As a result, XPEV stock looks like it is undervalued at this point.
This is especially so since the stock’s otherwise more than six-month 106% gain has been trimmed by the 12.5% decrease since the start of the year. However, XPeng is not alone. Its Chinese EV maker peer, NIO (NYSE:NIO) is down 11.1% year-to-date.
Outlook Bodes Well for XPNG Stock
XPeng made 12,964 deliveries in the fourth quarter of 2020, up 302% in the past year, but more importantly up 51% over the previous quarter. Moreover, sales were up 345.5% year-over-year, and +43.3% in the past quarter.
Profitability was up significantly as well. XPeng’s gross margin was up to 7.4% of sales, a huge increase from the 4.6% margin level at the end of Q3. As the company’s sales increase, its gross margin should continue to rise.
For example, Nio’s Q4 gross margin was over 17%, and Tesla (NASDAQ:TSLA) produced gross margins of 19.4% in Q4. So XPeng still has a way to go, but of course, it did not start operations until 2015 and is several years behind Nio.
Analysts now expect sales at XPeng to reach $2.15 billion in 2021, up from $895 million in 2020. Moreover, sales are forecast to grow by 95% in 2022 to 0ver $4.19 billion.
XPeng’s Valuation
At today’s market cap of $27.2 billion, XPEV stock trades for just 6.6 times 2022 forecast sales. Moreover, since the company now has $5.4 billion in cash, its enterprise value of $21.8 billion is only 5.2 times 2022 sales.
Compare this with Nio stock — It trades for 12.93x 2021 sales and 8.23x 2022 forecast sales. That means that XPEV stock is worth at least 58.3% more. This is based on the Nio 8.23x multiple compared to XPEV 5.2x EV ratio using 2022 sales projections for both companies.
This implies that XPEV stock should be valued at $57.17 per share or 48.3% higher. Other analysts tend to agree with me. For example, TipRanks shows that seven analysts have an average target price of $52.93 or 46.5% above the March 17 price. Marketbeat reports that 11 analysts have an average price target of $53.40, or 47.8% higher than today. So a good number of analysts agree with me that XPEV stock is quite undervalued.
However, not everyone on Wall Street agrees that this is going to happen. For example, Barron’s wrote that investors should stay away from Chinese EV stocks Nio, XPeng, and Li Auto (NASDAQ:LI). The author, Al Root, believes they won’t have the same amazing performance as Tesla stock. He wrote that it is time to “unplug” from Chinese EV stocks.
His argument is that all three stocks are overvalued and won’t have profits for several years. Second, he feels that Congress’s passage of a law requiring U.S. audits on Chinese stock will hurt Chinese EVs.
Third, he argues that once novel coronavirus vaccines become prevalent, the market’s obsession with Chinese EV stocks will ease. Lastly, he argues that the heavy subsidies in China for EV adoption could eventually wane.
What To Do With XPEV Stock
The problem with these arguments is that they don’t address the growth drivers for Chinese EVs over the next decade. The simple fact is that China will be the largest market for electric vehicles for the foreseeable future. The expected growth rates for XPeng in the next two years show this.
Moreover, XPEV stock’s fall since the beginning of the year has made the shares much cheaper. As I pointed out above, the stock now trades for just 5.2 times 2022 forecast sales on an EV basis. But Nio trades 47.8% higher on a price-to-sales basis.
This implies that XPEV stock is worth $57.17, which is close to other analysts’ target prices.
On the date of publication, Mark R. Hake held a long position in Tesla stock (TSLA).
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
