Shares in XPeng (NYSE:XPEV) stock, which still have a 93% 12-month return, are down 7% in July. Now granted, a bit of price correction for XPEV makes sense.
After all, U.S.-listed Chinese electric vehicle makers Li Auto (NASDAQ:LI), Nio (NYSE:NIO), and XPeng have had a great time since going public, providing investors with outsized gains in the last year.
However, the decline in EV stocks in 2021 left most investors a bit uneasy. Valuation concerns, increased global EV competition, and chip shortages are the main reasons EV stocks are down.
But that does not mean all is doom and gloom.
In fact, the sharp pullback should be seen as a huge buying opportunity. President Joe Biden’s green agenda, which includes EV tax credits and more consumer incentives to drive the adoption of electric vehicles, will act as a tailwind. And China, XPeng’s home turf, plans to phase out conventional gasoline-powered vehicles by 2035.
That is excellent news from a broader perspective. But ultimately, you want to pour capital into a company that is doing well on its own steam. On that front, there are plenty of reasons to be bullish on XPeng.
Quarter after quarter, it manages to increase the top line substantially. Delivery numbers are also rock-solid. And XPeng is not sitting on its haunches either. It is taking a proactive approach to global expansion.
Considering all these reasons, XPEV stock becomes an intriguing contrarian play when most investors look to recovery stocks as the next big thing.
XPEV Stock Will Benefit From Strong Fundamentals
XPeng has excellent fundamentals. For the last year, investors have been treated to one successful earnings release after the other, driving the stock price higher.
In the first quarter of 2021, the company reported total revenues of $450.4 million, representing an increase of 616.1% from the year-ago period. The gross margin was 11.2%, compared with a -4.8% for 2020. Quarterly vehicle deliveries reached 13,340 in Q1, representing year-on-year growth of 487.4%.
Most impressively, cash and cash equivalents were $5,525.4 million as of March 31, compared to $359 million last year. The growth has much to do with substantial share issuances over the last year. But investors will not mind, considering the impressive growth.
Meanwhile, XPeng has also announced its listing on the Hong Kong Stock Exchange. In the IPO, the Chinese EV maker sold 85 million ordinary shares globally, grossing about 14 billion Hong Kong dollars or approximately $1.8 billion. XPeng’s share offering is a dual-primary listing. That means it will be subject to the rules and oversight of both U.S. and Hong Kong regulators.
The dual listing serves a strategic purpose. In an interview with CNBC, Brian Gu, president of Xpeng, said, “Ultimately we want our customers to be our shareholders, and having the dual primary listing status in HK (Hong Kong) will give us eligibility to be connected to Chinese capital markets.”
Looking ahead, analysts foresee the Chinese EV maker to keep growing at a healthy clip. In fact, as the chart shows, XPeng will exceed the growth of most of its peers. Again, these are estimates, so there is a margin of error. But the writing is on the wall.
Concerns About Overvaluation
Overvaluation concerns are part and parcel of the EV sector. The industry bellwether, Tesla (NASDAQ:TSLA), is perhaps the biggest example. Craig Irwin, a senior research analyst at Roth Capital, has a price target of $150 for Tesla, which is a far cry from Friday’s close of $644.22 per share.
JP Morgan echoed similar sentiments in December 2020.
Warren Buffett is famous for his careful investment decisions based on evaluating a company’s underlying value. And the Oracle of Omaha is also not a fan. At the heart of these insights is the belief that EVs already have their potential priced in.
But the critical thing to analyze is that the EV market is basically the entire world. Yes, the developed world will take the lead in EV adoption. But the companies forming the fulcrum of this burgeoning industry have a huge target market. Hence, even though TSLA has been on an epic bull run, it still trades at 20x price-sales.
Do Not Get Caught Up in the Pessimism
XPEV has had another bumper quarter, it has gone public on the Hong Kong stock exchange, and in June, XPeng has delivered 6,565 vehicles, a record month with a 617% increase year-over-year.
Considering the economy is opening up, there is a propensity for investors to look at other options that are much safer. But XPeng has excellent catalysts that should push the stock upward in the foreseeable future. Considering all these factors, XPEV stock is an excellent bet.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.