After peaking at $74.49 late last year, XPeng (NYSE:XPEV) fell into a sustained downtrend. The selling capitulated alongside the drop in the electric vehicle sector. On March 5, XPEV stock traded as low as around $25.50 before rebounding to more than $35 today.
XPeng has two factors in play that will lead the stock’s next direction. One is that its Q4 earnings report and guidance are positive catalysts.
Another is that its second-half technology software launch date will test the most patient investor.
XPeng is losing money every quarter, while its stock reflects future profits ahead.
A Closer Look at XPEV Stock
In the fourth quarter, XPeng posted a 302.9% increase in vehicle deliveries, to 12,964 units. Importantly, P7 deliveries topped 8,527 units, up by 37.3% from last year. Nearly all P7 models delivered (95%) support XPILOT 2.5 or XPILOT 3.0.
“Based on our newer generations of XPILOT, we’ll definitely increase the pricing for different configurations,” said He Xiaopeng, the company’s co-founder, chairman and CEO.
The executive did not commit to a subscription model or one-off payment. The former would give XPeng a steady, predictable cash flow, which Wall Street would like.
The latter would increase quarterly revenue but give uneven sales performance. Either way, the average selling price will increase with the availability of the newest software technology in the vehicles.
XPILOT 3.0 is more than 20% of the entire P7 activation. In January, XPeng demonstrated it has an inexpensive and efficient way to deliver software upgrades when it introduced the new version for customers remotely.
In the fourth quarter, the company expects to introduce XPILOT 3.5 version to its models. Since it may charge its willing customers for the software update, expect profit margins to increase.
XPeng’s plans to increase headcount for research and development will weigh on costs in the near-term. Investors should expect more losses in the next few quarters.
Xiaopeng said the R&D team will double in size by the end of the year. This necessary investment will widen XPeng’s software technology innovation lead over its peers.
Profit margins will only expand and exceed costs as unit sales increase. The company needs higher rates of demand in 2021 and 2022. With each sale, the rising ASP will more-than-pay for the cost of the increased staff.
Battery shortages are ongoing risks to the component supply chain. XPeng expects an increase in battery supply will ease the bottleneck by the second quarter.
Furthermore, it is working closely with its battery suppliers to get the new lithium iron phosphate LPF battery in the updated P7 and G3 models. On March 3, XPeng announced the LPF batteries for the Chinese market.
In Q4, gross margin improved to 7.4%, up from a negative 6.6% year-over-year. Vehicle margin improved, too, thanks to a better product mix.
Material costs fell and manufacturing efficiencies increased. Assuming XPeng continues to benefit from lower costs, margins are set to rise to the low double-digit percentage.
XPeng’s stock-based compensation remains low, suggesting its staff is willing to delay bonuses until the balance sheet improves.
Supercharging station installations will add to short-term costs while paying off in the long run.
At the end of last year, there were 159 XPeng-branded supercharging stations across 54 cities. It plans to significantly grow the numbers of those stations in its network to more than 500 by the end of 2021.
According to analysts, the average price target for XPEV stock is $51.53. The consensus buy/strong buy is a bullish outlook that has yet to play out.
After the EV bubble popped, thanks to 10-year bond yields shaking the technology index, XPeng is a long way from the analyst price target. Management must execute on stronger sales and the year-over-year growth range each quarter. A resilient Chinese consumer nearly assures that pace strong demand next.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.