XPeng: Bloody Streets By November – Time To Add Then

Summary

• Multiple world events could culminate in massive volatility by November 2022: the Feds, US Mid-Term Elections, President Xi’s likely Re-election, and the eventual meeting between Biden and Xi.
• The ongoing semiconductor war may potentially be resolved then or go south very quickly, depending on the results of said meeting.
• Therefore, we’re highlighting XPEV’s highly volatile nature, with a massive plunge experienced thus far.
• Investors keen on adding XPEV may potentially see single digit stock prices by November in our opinion – allowing for a rather attractive but speculative entry point for long-term investing through the end of the decade.

Investment Thesis

XPeng Inc. still faces massive crosswinds in the stock market, given its lack of profitability and erratic automotive chip supply, on top of the growing geo-political issues between China and the US. Combined with the August CPI of 8.3% potentially triggering another 75 basis point hike in interest rates for September 2022, we expect to see the stock market and, consequently, XPEV, continue underperforming in the short-term. Notably, the S&P 500 Index has plunged by -19.25% in the three quarters of 2022, notably highlighting the overly bearish market.

Keen investors should avoid adding at these levels, given the massive volatility over the next two months. We reckon that early or mid-November 2022 would likely be the time of maximum pain, giving investors multiple attractive entry points for backing up the truck for long-term investing and growth. We think XPEV will likely perform exemplary well over the next decade, given its breakthrough Advanced Driver Assistance Systems (ADAS) and massive adoption in the EU over the next few years. Do not miss this strong contender to Tesla (TSLA).

XPEV Continues To Grow At All Costs, Delaying Its Stock Recovery In A Bearish Market

In FQ2’22, XPEV reported revenues of $1.1B and gross margins of 10.9%, representing YoY growth of 90.52% though a decline of a percentage point, respectively, with the latter attributed to rising battery costs. In the meantime, the company continues to report declining profitability, with net incomes of -$0.4B and net income margins of -36.3% in the latest quarter, representing a YoY decline of -217.8% and 4.5 percentage points, respectively.

The continued decline in profitability is mostly attributed to XPEV’s elevated operating expenses of $441.6M in FQ2’22, representing an increase of 50.34% YoY. These expenses still accounted for 39.8% of its revenues and 365.6% of its gross profits then. Despite the company’s rising sales, the rate of growth in its expenses remains elevated, thereby contributing to its lack of profitability thus far.

In FQ2’22, XPEV reported long-term debts of $748.97M and interest expenses of $3.33M, representing QoQ growth of 5.48%/ 6.38% and YoY growth of 34.13%/ -10.48%, respectively. Most of these capital raises were mostly attributed to the company’s increased net PPE assets of $1.38B in the latest quarter, indicating an increase of 10.4% QoQ and 95.46% YoY. Given its declining cash and equivalents of $1.34B in FQ2’22, indicating a decline of -8.2% QoQ and -43.93% YoY, we may see the company raise more capital through debt leveraging by mid-2023.

However, it is important to note that the Chinese government is also funding the majority of XPEV’s interest cost for their capital expenditure in their Guang Zhou and Wuhan plants, which would help alleviate their cash burn for now. In addition, through these aggressive investments, XPEV seeks to increase its total production capacity to 400K by 2023, or 600K, assuming a double shift. Though these numbers would still be shy of Tesla’s aggressive sum of 2M output by the end of 2023, we have to applaud XPEV’s efforts in coming this far since the company was only founded in 2015, as opposed to the former in 2003.

Combined with XPEV’s stellar Advanced Driver Assistance Systems (ADAS) already approved for public beta-testing in 6 major Chinese cities, we expect these investments to be top and bottom lines accretive eventually, with the speculative easing of global supply chains and macroeconomics by mid-2023. We also think these would lead to XPEV’s improved stock performances then, underscoring the stock’s massive potential for speculative multi-fold returns through the next decade, in our opinion.

For now, XPEV continues to rely on elevated Stock-Based Compensation (SBC) expenses of $35.3M in FQ2’22, representing a notable increase of 29.7% QoQ and 232.2% YoY. This has directly contributed to the increase in its diluted shares outstanding of 854.28M in the latest quarter, representing an increase of 0.34% QoQ and 11.06% YoY. Investors, take note of this share dilution machine.

Over the next four years, XPEV is expected to report revenue growth at a CAGR of 57.06%, while potentially reporting net income profitability of $0.72B by FY2025. Given the recent market pessimism, it is essential to note that these numbers represent an estimate downgrade of -12.31% and -27.27%, respectively, since our previous analysis in August 2022.

For FY2022, XPEV is expected to report revenues of $5.22B and net incomes of -$1.03B, representing YoY growth of 58.08% though a decline of -34.59%, respectively. It is apparent that the company is at a growth-at-all-costs stage, given its continuous cash burn by FQ3’22, with projected revenues of $1.01B and EPS of -$0.30, indicating an increase of 13.36% though a decline of -7.12% YoY, respectively. Only time will tell, though we are not hopeful for a stock recovery then.

In the meantime, we encourage you to read our previous article on XPEV, which would help you better understand its position and market opportunities.

So, Is XPEV Stock A Buy, Sell, or Hold?

XPEV 2Y EV/Revenue and P/E Valuations

XPEV is currently trading at an EV/NTM Revenue of 1.52x and NTM P/E of -13.61x, lower than its 2Y EV/Revenue mean of 8.56x though massively improved from its 2Y P/E mean of -46.80x. The stock is also trading at $14.56, down -74.20% from its 52 weeks high of $56.45, nearing its 52 weeks low of $14.50. It is evident that Mr. Market is more bearish than expected, given the massive plunge of -38.28% since our previous analysis.

XPEV 2Y Stock Price

Consensus estimates remain bullish about XPEV’s prospects, given their price target of $29.67 and a 103.78% upside from current prices. However, it is important to note that these numbers represent a notable downgrade of -15.22% from previous estimates.

In the meantime, we expect the XPEV stock to continue underperforming, mainly due to the erratic geopolitical relationship between China and the US, as a result of the ongoing semiconductor war. Combined with China’s insistence on the Zero Covid Policy further disrupting the recovery of the global supply chain, we expect to see further headwinds ahead, with things unlikely to improve by the end of 2022. President Xi Jin Ping’s re-election and the US midterm elections in November 2022 would also serve as the main catalysts for massive volatility in the short term, with things potentially resolving during the two world leaders’ first face-to-face meeting at the same time. We shall see.

Therefore, we iterate that this stock is a speculative Buy at single digits by November 2022, only suitable for those with a higher risk tolerance and a rather long-term trajectory, since XPEV is not expected to report profitability over the next few years.

Author: Juxtaposed Ideas, Seeking Alpha