The Chinese equity market has had a tough time this year. The troubles started last year, seemingly from antagonistic comments Jack Ma, the founder of Alibaba (NYSE:BABA), made. The local government there then went on a campaign of punishing large companies. In the process they decimated their stocks by imposing a slew of stricter policies. They were not discerning about sectors, but the EV stocks held up well in comparison. Today I want to focus on XPeng (NYSE:XPEV) stock to evaluate its viability as a long-term investment.
XPEV stock has done well if you compare it to the iShares China Large-Cap ETF (NYSEARCA:FXI). While it is not up as much as the S&P 500, at least it is positive and up 8% year-to-date. Meanwhile, the FXI is down 14% with no clear sign of stabilization yet.
The EV Opportunity Has Legs
First let’s discuss the prospects of electric vehicles in general. The consensus now is that they will eventually replace the internal combustion engine. I don’t disagree with the momentum the EVs are currently building. It is powerful, but the process is still in its infancy stage. Therein lies the exciting opportunity in XPEV stock. Based on this logic, the whole cohort will have a long runway ahead for growth. The commotion that Tesla (NASDAQ:TSLA) CEO Elon Musk stirred on Twitter will probably cause temporary drama for all EVs.
This company is doing just that and proving it to Wall Street investors with facts and figures. There are other EV companies hogging the headlines, and they are taking away bids from this one. However, I believe in taking risk on concepts with proof, not promises. In other words, I would rather risk money on a XPEV that currently has a strong P&L. At least I can ascertain actual growth metrics and project a tangible opportunity that lies ahead.
XPEV management has grown revenues 10 times in 3 years. Unit sales also grew 10 times in 2 years. Clearly these stats have my vote of confidence, and owning XPEV stock absolutely makes sense.
XPEV Stock Moves Fast
Although they say that we shouldn’t time stock entries, when one moves as fast as XPEV stock is moving, it’s necessary.
Last year, XPEV spiked 300% in a month. That is unnatural growth for a stock. As a result it came back crashing almost as fast. Since then, it has had wild fluctuations, but nowhere near as much as those initial swings.
This makes it somewhat important to at least consider the charts before taking a large position in the sock. Those who simply bought the 2020 highs lost 60% of their money by Easter.
It has been trading in a tight range, which usually indicates that a move is coming. Unfortunately we cannot already determine in which direction, but at least we can be ready. One way investors can do that is by only taking a partial positions. This leaves room to add in case the move is down. Better yet, the smarter thing to do is to wait for the breakout to happen.
If I put my trader hat on, I can see the two lines that will bring action. If the bulls break out from $50 per share, they can then accelerate toward another 20% rally. Conversely if XPEV has room to fall up to 8%, but that would be an opportunity to buy it. Dips that follow breakouts are usually to gather stronger momentum. Patience will deliver the retest of $56 per share soon enough.
These are small moves in comparison to the potential upside of this company. However, I can’t in good conscience just take a full-size position without considering the short-term action. I would rather see my investments start off on a good note. I often get push back on this, but if it truly doesn’t matter in the long term, then there is nothing wrong with waiting a bit.
The Valuation Forecasts Are Reasonable
From a valuation perspective, I give companies growing this fast a pass on profitability. The only thing that matters is to grow the revenue stream. Moreover, this team looks like they’re doing it responsibly, because there isn’t a bloat. XPEV stock has a price to sales ratio of 21x, which is comparable to that of Nio (NYSE:NIO) and Tesla. Incidentally, these are the only three EV companies that I would consider risking money on.
Chasing stocks like Lucid (NASDAQ:LCID) and Fisker (NYSE:FSR) is not what I do. There’s just too much hope built into stocks without the actual dollars and cents in the P&L yet. This is not to say that they won’t be successful, it’s just a matter of taste. The new investment mentality on Wall Street works in an extremely bullish market. They’ve yet to go through the test of a bearish stent.
Luckily for them, they have some time before this happens. I don’t think a bear market will come for some time. The government went overboard with its efforts to restart after the global shutdown. All stocks are rising, because companies are more profitable than ever. Case in point, we broke new records last week.
The true test will come in time: How well will XPEV stock do when the equities in general struggle? When markets are on edge, investors don’t buy frothy stocks. I think this one will have enough fundamental proof to hold up well. Therefore, XPeng makes for a logical long-term investment. It can also double as an active trader’s dream stock in the meantime.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.