To The Moon

Summary

• XPeng's share price went above the $50 mark in late-November 2021 after it released better-than-expected Q3 2021 results and Q4 2021 guidance.
• But XPEV's shares have halved year-to-date in 2022, given the valuation de-rating for growth stocks, concerns regarding potential revenue misses for 2022, and delisting fears.
• I rate XPeng as a Hold; I think the company's shares won't go back up to $50 levels in the short term.

Robert Way/iStock Editorial via Getty Images

Elevator Pitch

I have a Hold investment rating for XPeng Inc. (NYSE:XPEV) [9868:HK]. My Neutral view on the stock is based on the premise that the company's shares aren't likely to rebound significantly (let alone return to $50 levels) in the near term. The negative headwinds hurting XPEV's shares such as investor style shift, supply chain disruptions for the Chinese automotive industry and concerns over the potential delisting of US-listed companies are likely to persist for a while. With its valuations reflecting most of the negatives after the sell-down in recent months, a Hold rating for XPeng is appropriate.

XPEV Stock Key Metrics

XPEV describes itself as "a leading Chinese smart electric vehicle company that designs, develops, manufactures, and markets Smart EVs" which targets "technology-savvy middle-class consumers" in its press releases. XPeng will report its Q4 2021 financial results on March 28, 2022, so I will review the company's most recent Q3 2021 financial metrics to see how the company has performed.

XPeng issued its Q3 2021 financial results media release on November 23, 2021 before the market opened, and this was well received by the market with XPEV's shares rising by +8% from $47.39 of November 22, 2021 to cross the $50 mark and close at $51.30 as of November 23, 2021. In the next week, XPeng's stock price gained further to reach a 52-week high of $56.45 on December 1, 2021, during intra-day trading.

The company's revenue expanded by +187% YoYin Q3 2021, and this was +9% better than what the market had anticipated. XPEV's vehicle deliveries almost tripled YoY from 8,578 units in Q3 2020 to 25,666 units in Q3 2021, and this exceeded the higher end of the company's earlier vehicle deliveries guidance of 23,000-25,000 units. Looking forward, XPeng expects to achieve vehicle deliveries of 35,500 units (mid-point of guidance) in the fourth quarter of 2021, which would be equivalent to a +174% YoY increase. XPEV also guided that its revenue should jump by +156% YoY to RMB7.3 billion (mid-point of guidance) in Q4 2021, which was +26% higher than the sell-side's consensus fourth-quarter top line estimate at the time of the Q3 earnings release.

But the good times did not last, as I highlight in the subsequent section.

Why Has XPeng Stock Dropped?

XPeng's stock price has fallen roughly by half since the start of the year. XPEV's shares fell from $50.27 as of January 3, 2022 (first trading day of the year) to $24.97 as of March 17, 2022.

In my opinion, there are three factors that have led to the severe decline in XPEV's share price.

Firstly, XPeng has suffered from a substantial valuation de-rating.

Investors have been rotating away from high (revenue) growth, loss-making stocks to profitable companies which are returning capital to shareholders via dividends or buybacks. This shift in investor preferences is aligned with expectations of rising interest rates in the future, which tend to be negative for high-growth companies.

Specifically, XPEV's consensus forward next twelve months' Enterprise Value-to-Revenue multiple has compressed from above 8 times in late-November 2021 to 2.8 times as of March 17, 2022.

Secondly, there are concerns that the revenue growth and margins of Chinese electric vehicle companies like XPEV could disappoint the market in 2022.

Market consensus already expects XPeng's top line expansion to slow from +252% in fiscal 2021 to +97% in FY 2022. Besides a higher base for comparison in 2021, it is possible that supply chain disruptions could be a drag on Chinese electric vehicle sales in 2022. A recent March 11, 2021 South China Morning Post article highlighted that China Passenger Car Association's 5.5 million NEV (New Energy Vehicle) sales forecasts could be too bullish, as a researcher from North China University of Technology quoted in the article "predicted that output of batteries and car chips may only be enough for 4.4 million NEVs this year."

Even if XPeng and its Chinese electric vehicle peers are able to secure sufficient semiconductor chips and batteries to meet market demand, it is likely to come at the expense of higher costs and wider losses. In other words, XPEV's 2022 year-to-date share price correction could be attributed to concerns of below-expectations financial results for the company this year.

Thirdly, worries about the potential risk of Chinese stocks delisting from the US might have hurt investor sentiment for XPEV as well.

XPeng's share price corrected from $28.65 as of March 9, 2022, to $19.75 as of March 14, 2022. This was linked to news of the SEC listing "five China-based companies that could be delisted if they don't allow U.S. authorities to review company audits for three straight years" as reported by Seeking Alpha News on March 11, 2022. XPEV's shares later rebounded strongly to close at $27.53 as of March 16, 2022, after Xinhua News Agency highlighted that "the Chinese government continues to support various types of companies to list overseas." This seems to suggest that China will engage with the US on the topic of Chinese listings in the US and related audit issues.

XPEV is in a relatively better position than most other US-listed Chinese companies as its shares are already dual-listed in both the US and Hong Kong. But assuming that XPeng is eventually compelled to delist from the US market in a few years' time, it is still a negative for the company's shares. The Hong Kong equity market or other stock markets for that matter are inferior to the US market in terms of liquidity and valuations. If XPEV ends up being solely listed on the Hong Kong Stock Exchange, the company loses an important channel for further financing, and its valuations might further de-rate to be in line with the broader Hong Kong market.

In the next section, I assess XPeng's stock price outlook.

Can XPEV Stock Rebound To $50?

It is challenging for XPeng's share price to recover back to $50. Based on my calculations, XPEV's consensus forward next twelve months' Enterprise Value-to-Revenue multiple will have to expand to 6.6 times for its shares to be valued at $50.

I am of the view that a significant rebound for XPEV's shares in the near term driven by valuation multiple expansion is unlikely. As I explained in the prior section, a shift in investors' preferences away from growth stocks, headwinds for the Chinese automotive industry at large, and delisting fears are going to cap XPeng's capital appreciation potential for now.

Furthermore, XPEV's current valuations are reasonable based on a peer comparison exercise.

Peer Valuation Comparison For XPEV

Source:S&P Capital IQ

XPeng's forward Enterprise Value-to-Revenue multiple is higher than LI, but lower than NIO. Although XPEV boasts slightly faster FY 2022 revenue growth rates as compared to its peers, its forecasted gross margin are the lowest in the peer group. As such, it is hard to argue that XPeng's shares are undervalued based on a peer valuation comparison.

Is XPEV Stock A Buy, Sell, Or Hold?

XPEV is a Hold. XPeng's valuations have already de-rated significantly, which prices the negatives to a considerable extent. On the other hand, the current headwinds that are a drag on its share price aren't likely to ease anytime soon.