On the surface, it’s difficult to argue against Xpeng (NYSE:XPEV) stock here. With its home market being the world’s largest in terms of automobiles, the advantage for Xpeng and other Chinese electric vehicle makers is considerable.
Also, it doesn’t hurt that XPEV stock is supported by a favorable manufacturing circumstance.
Many years ago, before China started competing in earnest in the EV space, Chinese companies attempted to build regular combustion cars.
Frankly, the results weren’t encouraging.
Here’s how automotive online journal Jalopnik.com described the situation in 2013:
We Westerners look at these shameless Chinese knockoff cars with a mix of laughter and incredulity. The Chinese, apparently, aren’t looking at them at all.
…Chinese automakers are consolidating and scrapping some of their brands on the heels of buyers opting for Audis, BMWs and Nissans over their home market brands. The Wall Street Journaltalked to several young Beijingers about what cars they want to buy, and none of them said they wanted a Chinese car. A Hyundai or a Toyota? Sure, but not a Dongfeng or a Geely.
Shift in Sentiment Fueled XPEV Stock
Fast forward seven years and the narrative has changed dramatically with EVs. Suddenly, people are looking at Chinese cars — and not just Chinese consumers.
For instance, Nio (NYSE:NIO) made waves for its electric supercar. And while Xpeng isn’t making Lambo competitors, the shift in sentiment has certainly rubbed off on XPEV stock.
What changed? First was the massive surge in Xpeng shares that occurred in late 2020. While investor sentiment has cooled off since then, the stock has been on a run recently. Since mid May, XPEV stock is up 68.6%. NIO shares are up 38.9% in the same period.
Second, the Chinese government is committed to do whatever it can to help its car makers dominate the EV sector. Manufacturing wise, the simpler construction of EVs — which require far fewer parts than building a combustion car — benefits XPEV stock and its ilk.
Longer-Term Questions May Dog XPEV Stock
Despite the many positives for Xpeng, it’s only fair to wonder how viable the investment narrative may be over the long haul. Mainly, investors should think about the underlying fundamentals before betting too heavily on XPEV’s current rally.
While XPEV stock has performed well based on bullish sales guidance and improved gross profit margins, the lack of profitability is a concern.
For instance, in the first quarter of 2021, Xpeng rang up $453 million in sales, up 668% from the year-ago quarter. However, net losses expanded to $121 million from $93 million in the same comp.
Just as worryingly if not more so, operating losses expanded to $139 million from $92 million. I’m reminded that this isn’t a problem exclusive to XPEV stock.
Rival Nio has been printing serious red ink over the years, although to be fair, it pared much of the losses for fiscal year 2020.
And it’s not just Chinese EV makers either. Tesla (NASDAQ:TSLA) wouldn’t be profitable at its current state without carbon credit sales.
How Much Support Can Beijing Provide?
How much influence does Chinese government support have on investments like XPEV stock and more importantly, is it sustainable?
A recent analysis from the Massachusetts Institute of Technology implies that investors should be cautious about Xpeng’s prospects.
To be clear, MIT does not have an opinion about XPEV stock. But from the information it provided, the analysis suggests that without Chinese government subsidies, EVs may end up being more expensive to own over the long term than combustion-based cars.
Further, China’s mandates for its EV rollout may exacerbate operating and net loss woes for Xpeng and its rivals.
By aggressively pushing EVs, manufacturers may be forced to lower their prices to economically unsustainable levels without government aid. That could get very expensive for all parties involved.
Technical Posture Isn’t Inviting
Finally, while the rally from around mid-May of this year has been impressive for XPEV stock, it’s also noticeable that momentum has faded since the middle of last month. It seems many investors are stepping on the brakes and reassessing the fundamentals.
Personally, I’d wait to see if XPEV will provide a better discount. This is a crowded market and having a contested road to profitability may become increasingly problematic for both current and prospective investors.
On the date of publication, Josh Enomoto 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.
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.