/Electric%20car%20being%20recharged.jpg)
Xpeng Motors (XPEV) stock has whipsawed over the last year. First, it crashed 80% in 2022 and fell to its all-time lows. It has been quite volatile in 2023, as well; after gaining 70% and 55%, respectively, in June and July, the stock is down almost 24% in August.
On balance, the stock is still up over 61% for the year - but while fellow Chinese electric vehicle (EV) maker Li Auto soared to new all-time highs in 2023, XPEV still trades at a fraction of its 2020 highs.
Why has XPEV Stock Fallen in August?
To start, let’s understand why XPEV has fallen in August. First, there has been a broad-based sell-off in growth sectors, including EV stocks, amid the rise in U.S. bond yields, with the benchmark 10-year Treasury yield ($TNX) rising to its highest level since 2007. The deepening slowdown in China – which accounts for the bulk of Xpeng’s sales – is also not helping matters, and Chinese stocks have looked weak in August.
Some company-specific factors are also adding to the pessimism around Xpeng Motors. For instance, while its deliveries rose above 10,000 for the first time all year in July, they were still lower than the corresponding month last year.
The company also posted a record loss in Q2, and its gross margins – which had been falling for the last several quarters – went negative. The departure of Wu Xinzhou, its vice president of autonomous driving, also dampened investor sentiment, considering the importance of that business segment for Xpeng.
Why Should You Buy the Dip in Xpeng Motors Stock?
After the recent selling, I believe Xpeng Motors looks like a good stock to buy right now for the following reasons:
- Xpeng Motors expects its shipments to rise gradually, and forecast deliveries between 39,000-41,000 in Q3. While that's below the average monthly deliveries of 15,000 that it previously predicted for the quarter, it nonetheless would mean a continued increase in deliveries after a dismal first half. The company expects its monthly deliveries to rise further in Q4, and is striving for peak monthly deliveries of 20,000.
- The rising deliveries, coupled with cost cuts and organizational changes, should help Xpeng Motors’ financial performance, and the company expects to post positive operating cash flows and gross margins in Q4. BofA Securities analyst Ming Hsun Lee, who upgraded XPEV from a “hold” to a “buy” earlier this week, expects the company to turn profitable and generate positive free cash flows in 2024. If her prediction - which is much rosier than consensus estimates - turns out to be true, it would mark a big milestone for the company, as positive free cash flows would mean that it won’t need to raise more capital to fund capex.
- Xpeng Motors also has a reasonably strong balance sheet, and held $4.65 billion as cash, restricted cash, and short-term investments at the end of June - which should take care of its current cash burn.
- The company has also expanded its operations to Europe, and further international expansion should help increase deliveries. Its G6 SUV has received a good response in China, and the company is looking to launch more models on its low-cost Smart Electric Platform Architecture (SEPA) 2.0 platform in the coming years – including two in 2024 – which should help increase its market share.
- XPeng Motors also has burgeoning autonomous driving technology in China, even as Tesla (TSLA) does not have permission to do so in Chinese cities, apparently over spying concerns. While autonomous driving companies are currently posting losses and none of them currently offer L4 or fully autonomous cars, the industry holds long-term promise, and Xpeng is gradually rolling out the service to more Chinese cities.
- Along with autonomous driving, I believe markets are underappreciating Xpeng Motors’ partnership with global auto giant Volkswagen, which will help the company’s profitability, as well as enhance the brand image.
Finally, while China might not roll out a big-bang stimulus, considering the country's already bloated national debt - which, at over 300% of GDP, is among the highest in the world - the government continues to support its EV sector, which it sees as strategic in nature. China reiterated its commitment to the sector when it announced the extension of its EV purchase tax exemption until 2027.
XPEV Forecast: Analysts Are Getting Bullish
XPEV has received a consensus rating of Hold from analysts. However, Wall Street has been getting incrementally more bullish on the Chinese EV stock, and on Monday BofA raised the stock’s target price to $22.
Jefferies also upgraded XPEV stock from a Hold to Buy after the company partnered with Volkswagen (VWAGY) in July, and assigned a 12-month target price of $25.30 - which implies an upside potential of 57% over current prices. And while UBS downgraded the stock to a Hold towards the end of July, it was primarily due to the steep rise in the stock. The brokerage simultaneously raised its target price to $23, which is above the consensus target price of $16.78.
Markets did price in a lot of good news immediately, as UBS said - but Xpeng Motors stock has already dropped significantly from its July 2023 highs. I believe it makes sense to buy the dip, considering the company’s strong growth prospects and reasonable valuations.
On the date of publication, Mohit Oberoi had a position in: XPEV . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
