- There’s every reason to believe that XPeng will continue to expand within China, which will lead to the further improvement of its top-line performance.
- By offering electric vehicles at affordable prices in the biggest EV market in the world, XPeng is poised for growth.
- We continue to hold our long position in XPeng.
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As one of the most popular EV startups in China, there's every reason to believe that XPeng (NYSE:XPEV) will continue to expand within the mainland and increase its sales in the foreseeable future. The company's outstanding performance in 2020 alone shows that its business is far away from reaching its peak, so investors should expect to see the improvement of the top-line performance in the following quarters. Considering this, we believe that by offering electric vehicles at affordable prices in the biggest EV market in the world, XPeng is poised for growth and that's why we continue to hold our long position in the company.
Meet the "Chinese Tesla"
XPeng is a popular Chinese electric vehicle company that produces cars for the mass market mostly to Chinese consumers. As of today, XPeng produces only two electric models, an SUV that's called G3, and a sedan that's called P7. Later this year, the company also plans to launch its third model.
While XPeng's stock has declined by ~10% since our latest article on the company came out in February, it still outperformed the S&P 500 index in the last six months and we believe that the shares have more room for growth in the near term.
Chart: Seeking Alpha
The biggest advantage of XPeng is that it was able to establish a strong presence in the Chinese EV market in the last few quarters, and as a result, it's now one of the most popular EV names in the region. Thanks to its popularity, the company showed outstanding Q4 results, which were published last month. During the quarter, XPeng's revenues increased by 345.5% Y/Y to $436.99 million and were above the consensus by $32.38 million. In addition, its deliveries during the period increased by 302.9% Y/Y to 12,964 units, while its gross margin in Q4 was 7.4%, above the consensus of 6.5%. On top of that, by the end of 2020, XPeng managed to increase the number of its electric charging stations to 159.
Going forward, XPeng has all the chances to continue to grow and expand its footprint in China and abroad. The company's latest deliveries data for Q1 alone indicates that we should see a further improvement of its top-line performance in the following quarters. According to the company, in January, February, and March its deliveries increased by 470% Y/Y, 1,281% Y/Y, and 384% Y/Y to 6,015 units, 2,223 units, and 5,102 units, respectively. Its total deliveries in Q1 were up 487% Y/Y to 13,340 units. Such a surge in deliveries shows that XPeng becomes more popular with each quarter and there is every reason to believe that such a surge in deliveries will continue in the following months.
The major reason why we believe XPeng will become a successful enterprise in the long-term is due to the fact that it's one of the most established EV names in China that constantly grows. According to various reports, in 2021 alone the sales of electric vehicles in China will grow at 51% and will account for 9% of all cars sold in the region. With such a growing market, which at the same time is also the biggest EV market in the world, XPeng has all the opportunities to continue its non-stop growth. While Tesla (TSLA) currently dominates the Chinese EV market, the worsening of relations between China and the United States could push the Chinese government to more aggressively support its domestic companies and put them in leadership positions at home in the near term. A few days ago, XPeng already announced that it plans to open its third manufacturing facility in Wuhan with the help of the Chinese government. On top of that, the company also has backing from its local government in Guangdong province, which last month invested over $70 million in XPeng to help it expand within the region. Considering this, it's safe to assume that the biggest beneficiaries of the growth of a Chinese EV market will be Chinese companies themselves and XPeng will undoubtedly be able to continue to expand at home quicker than its overseas peers. In addition, since XPeng has no presence in the United States, a possible trade war will not affect it directly.
On top of all of this, another advantage of XPeng is that it's a safer investment than hundreds of other unknown Chinese EV startups. The company already received backing from Alibaba (BABA) and several major Chinese banks, so it's unlikely that it will become the next Luckin Coffee (OTCPK:LKNCY). In addition, the company doesn't have an overleveraged balance sheet, as it has $5.06 billion in cash reserves and only $252 million in long-term debt, so it's unlikely that it will be diluting its shareholders in the near term, as it's not desperate for funding at this stage.
The only downside that we see is the relatively high price of XPeng shares. By trading at a market cap of ~$27 billion, the company's current price-to-sales ratio is ~20x. However, as was the case with Tesla, there's an indication that as long as deliveries continue to grow and sales increase, the stock will be performing well in the long term. As China aims to become carbon neutral by 2060 and electrify its transportation infrastructure, there's every reason to believe that the company's revenue will take off in the next couple of years. The street already expects XPeng's revenues to increase from $2.13 billion in FY21 to $4.16 billion in FY22, while at the same time its EPS loss is forecasted to decrease from -$0.71 in FY21 to -$0.48 in FY22, as the business slowly continues to improve its margins.
Source: Seeking Alpha
Considering all of this, we believe that XPeng is one of the most attractive Chinese EV stocks at this stage. The company already has backing from its government, it grows in popularity every quarter, and by offering electric vehicles at affordable prices it could be considered one of the best EV manufacturers in the region. With a consensus price target of $50.69 per share, we believe that XPeng has more than enough room for growth at the current price, and for that reason, we have no plans to unwind our long position in the company anytime soon.
Source: Seeking Alpha
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Analyst’s Disclosure: I am/we are long XPEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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