We are now approaching the end of 2023, and while the S&P 500 Index ($SPX) briefly entered into a correction in October, it has not only rebounded from those levels but also hit new 2023 highs recently. Specifically, growth stocks - which bore the brunt of the market crash in 2022 - have shown strength this year.
As background, growth stocks tend to underperform in a rising interest rate environment, as the earnings of these companies are skewed towards the future - and these earnings become less valuable in current dollar terms when discounted at a higher rate.
Meanwhile, even as the Fed continued its rate hike spree into 2023, and the yields on the 10-year Treasury hit 5% for the first time since 2007, investors still warmed up to growth stocks amid hopes that the Fed’s tightening cycle is now at its tail end.
Cathie Wood of ARK Invest is among the most well-known growth-oriented fund managers, and an analysis of ARK funds can show us how growth stocks have performed in 2023. While her flagship ARK Innovation ETF (ARKK) has risen 57% so far in 2023, the Fintech Innovation ETF (ARKF) has risen 76% - both outperforming the Nasdaq Composite ($NASX) by a good margin.
Growth stocks have already had a good rally in 2023, but I believe EV stocks Xpeng Motors (XPEV) and NIO (NIO) are two names that could go on to double in 2024. Here’s why.
2024 Could be a Transformational Year for Xpeng Motors
This was a pivotal year for Xpeng Motors, as it launched its SEPA 2.0 platform - which it says will significantly reduce manufacturing costs. The company also launched its G6 SUV, which has received a good response and is the market leader in its category
Xpeng also partnered with Volkswagen (VWAGY), which not only took a stake in the company, but the two will also jointly co-develop vehicles for the Chinese market. Under another agreement, Chinese ride-hailing app Didi took a stake in Xpeng in exchange for its self-driving business. As part of the agreement, Xpeng will launch a new electric vehicle (EV) brand under the “MONA” project - which will produce EVs priced in the ballpark of $20,000.
XPEV stock topped $20 earlier this year, but now trades near $15, which is still a YTD gain of about 57%.
Meanwhile, 2024 could be a transformational year for Xpeng Motors for the following reasons:
- Market share gains: Xpeng Motors’ deliveries have exceeded 20,000 for two consecutive months, and the company’s sales should increase sharply in 2024. During the company’s Q3 2023 earnings call, CEO He Xiaopeng said, “we're ready to gain considerable market share in 2024, achieving a high growth target that is significantly above the industry average.”
- New Models: Xpeng Motors will start delivering its X9 MPV in January and is targeting more models based on the SEPA 2.0 platform. It is also working to launch the first model under the “MONA” brand in Q3 2024. During the Q3 2023 earnings call, management said that it is nearing a “milestone” on its joint development with Volkswagen soon - while adding that it also exploring international collaboration with the German auto giant.
- XPEV is working on several cost-cutting initiatives to lower expenses by 25% or more next year. Also, management said that X9 would be a high-margin product and its 2024 margins would be much higher than in 2023. Xpeng posted positive free cash flows in Q3, and expects its free cash flows to rise further in Q4, which is no small feat considering the perennial cash burn of its EV peers.
Some Analysts Expect NIO Stock to Double in 2024
NIO bulls might be disappointed in 2023, as not only did the stock’s returns trail that of its Chinese EV peers, but the stock is still in the red and looks on track to deliver negative returns for the third consecutive year.
NIO stock is quite popular among retail investors and sell-side analysts, at least two of whom expect the stock to double in 2024. Morgan Stanley analyst Tim Hsiao, for instance, has a target price of $18.70 on NIO - about 151% above current levels.
Even NIO’s mean target price of $12.30 is a premium of 65% from here, while the Street-high target of $19.20 - from Citi - implies an expected upside of 157%.
Several factors should support a rally in NIO stock in 2024. These include:
- Margin expansion: NIO expects its gross margins to rise to 15% in Q4, and the margins are expected to strengthen further in 2024. It also expects vehicle margins to range between 15%-18% in 2024, compared to 11% in Q3 2023.
- Rise in deliveries: NIO has already launched all its current models on the NT 2.0 platform, and is next looking to launch the mass-market brand ALPS in 2024. As its deliveries rise in 2024, the stock should also see some traction.
- Move to self-manufacturing: NIO has acquired some manufacturing plans from JAC, but hasn’t yet divulged whether it will move to self-manufacturing. During the Q3 earnings call, the company said that if it moves everything in-house, it would lower manufacturing costs by 10%. A move to self-manufacturing now looks imminent for NIO, which should support an expansion in margins.
- Low valuations: Finally, in terms of valuations, NIO is probably the cheapest among quality EV plays, and trades at a next-12-month price-to-sales multiple of a mere 1.29x - which, for context, is less than a fifth of Tesla’s (TSLA).
Overall, if the macro conditions remain supportive, NIO and Xpeng Motors are two growth stocks that have the potential to double from these depressed levels if they can deliver on the forecasts that they have made.
On the date of publication, Mohit Oberoi had a position in: NIO , XPEV , ARKK . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
