With shares going in reverse, what’s the next move for Xpeng (NYSE:XPEV)? Back in December, after Xpeng stock slid around 35% from its all-time highs, I recommended to tread carefully, ahead of a possible continued pullback.
What’s my view now? It’s looks as if said pullback is just around the corner. Sure, the EV megatrend isn’t stopping anytime soon. That’s clear from this company’s continued strong delivery numbers. Not to mention, the fact China EV sales are set to soar, from 1.8 million vehicles in 2021, to as many as 6 million vehicles by 2025.
Yet that doesn’t mean Xpeng shares will continue to surge.
Why? Right out of the gate after its IPO last August, much of this growth factor was already factored into its stock price. And, with shares up more than 100% since then, it’s safe to say high growth is more than priced in.
As a result, shares have little room to run. With the potential of markets (and EV stocks in particular) correcting, coupled with the risk this upstart fails to keep up with its growing competition, downside risk may be growing.
So, what’s the play? If you bought in at lower prices, take profit, pronto.
Why The Sell-Off in Xpeng Stock Could Continue
After bouncing back to nearly $60 per share at the start of January, Xpeng has pulled back in recent days. The stock now trades for around $48 per share.
Some may see this as a great opportunity to buy the dip. But it’s debatable whether this is the right move. On one hand, you can make the argument that the sell-off in Xpeng stock, as well as other leading EV plays like Nio (NYSE:NIO) and Tesla (NASDAQ:TSLA), is temporary.
Why? Blame it on the epic run-up in GameStop (NYSE:GME), and other short-squeeze stocks. How does the “short squeeze saga” affect EV stocks? This event has indirectly caused markets overall to head lower, as participants de-lever. Also, one can speculate that retail investors, now more focused on finding the next GameStop, are rotating out of this sector. Once the mania subsides, things could bounce back, with Xpeng and its peers paring their recent losses.
On the other hand, what if the “short squeeze saga” is the straw that breaks the camel’s back? That is to say, the stock market “melt-up” we’ve seen in recent month is about to reverse course? This could mean big declines ahead for some of the past year’s highest flyers, including EV stocks.
Yet, I wouldn’t make a bear case alone for Xpeng stock on where the market could be potentially headed. It’s typically not a profitable move to try and time the market. But, besides the overall risk the “EV bubble” is about to burst, there are factors specific to this company that could mean risk/return isn’t in your favor at today’s prices.
Concerns Beyond a Potential Pop of the EV Bubble
Worries about a possible burst of the EV bubble may be the top reason why I’m bearish on Xpeng shares. But there are company-specific risks to consider as well. For starters, its triple-digit delivery growth numbers have raised investor expectations to unsustainable levels.
Estimates call for revenue to rise from around $857.7 million in 2020, to $2.1 billion in 2021. Yet, if growth falls short of triple-digit projections, it’ll be hard to justify the current growth premium priced into shares. As it stands now, the stock trades for a forward price-sales ratio of around 19.8x. It’s a valuation on par with that of Nio, but frothy, nevertheless.
Why could Xpeng’s growth slow down, even as Chinese EV sales overall are set to rise more than three-fold in the next four years? Potentially, due to high competition. This upstart isn’t only competing with its local “Fab Four” peers Nio, Li Auto (NASDAQ:LI), and WM Motor.
Don’t forget Tesla could disrupt the market with the pricing of its Model Y. Global legacy automakers like Volkswagen (OTCMKTS:VWAGY), via its joint venture with SAIC Motor, are also aggressively entering this market.
On top of the competition heating up, another factor could impact sales growth as well. China is cutting EV subsides by 20% this year. This could impact electric vehicle sales growth in 2021.
Take Profit Ahead of a Possible Continued Sell-Off
Only time will tell whether we’re seeing the start of a correction in electric vehicle stocks. But that’s not the only concern here with this overvalued EV play. Facing stiff competition from both homegrown and global competitors, it’s doesn’t look worthwhile (at today’s valuation) to bet it’ll go off without a hitch.
So, what’s the call with Xpeng stock? If you own it, take profit, ahead of a possible continued sell-off.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.
