VWAGY - XPeng: Don't Pay More Than Volkswagen Did (Rating Downgrade)

2023-08-05 10:00:00 ET

Summary

• The XPEV stock has rallied optimistically indeed, thanks to VWAGY. Then again, the $700M investment for 4.99% stake values the Chinese automaker at a mere $14B or $15 per share.
• While XPEV is expected to generate an impressive top-line CAGR of +36% through FY2025, profitability remains a dream for now, with more cash burn expected through FY2026.
• Therefore, while XPEV may benefit from improved supply chain and lower barrier of entry to the EU market, it remains to be seen if the current optimism may hold.
• For now, while the Chinese automaker may report a double beat FQ2'23 performance, profit margins may still be underwhelming.
• Investors that add here may face further volatility indeed, with traders likely to cash out and add again at single digits. Do not chase XPEV to no man's land.

The XPEV Investment Thesis Remains Robust, But Not At This Inflated Level

We previously covered XPeng (NYSE: XPEV ) in June 2023, discussing its strategic restructuring, including entering the mass market and reducing operational costs.

The launch of the XNGP Navigation Guided Pilot software system might also differentiate XPEV from domestic competitors in the Chinese market, since market analysts had likened it to Tesla's ( TSLA ) Autopilot offering.

However, it appeared that we had been too greedy, recommending investors to wait for a retracement to $9 for an improved margin of safety at that time.

XPEV 1Y Stock Price

This is because the XPEV stock had rallied tremendously since then, thanks to the unexpected partnership with Volkswagen ( OTCPK:VLKAF ) ( OTCPK:VWAPY ) ( OTCPK:VWAGY ).

This is an interesting strategy indeed, since VWAGY will also adopt XPEV's Active Driving Assistance System, XNGP, while ignoring TSLA's Autopilot offering, Ford's ( F ) BlueCruise, and General Motors' ( GM ) Super Cruise, amongst others. Then again, with XPEV already testing a full scenario Level 4 equivalent capability , it is also unsurprising that the partnership has occurred.

In addition, the two automakers are looking to collaborate on EV platforms, software technologies, and supply chain, allowing XPEV to tap on VWAGY's global expertise, further boosting the Chinese start up's optimization cadence.

It is not overly ambitious to project an eventual expansion beyond China as well, since VWAGY remains the automotive leader in the Europe, with 217.1K EVs sold YTD and 19.6% of EV market share in April 2023. This number well exceed TSLA's EU sales of 138.29K (+121.8% YoY) by May 2023, with VWAGY also boasting over 200K EVs in the EU order bank by the end of H1'23.

This partnership appears to be a win win situation for both automakers indeed, since XPEV may refresh VWAGY's EV offerings while breaking the former's entry barrier to the EU, since most Chinese automakers have failed to gain traction thus far.

With a launch target by 2026, we believe the uncertain macroeconomic outlook may have normalized then, with the mixed sentiments surrounding Chinese EVs likely lifted, triggering further tailwinds to XPEV's adoption in the EU.

Based on VWAGY's $700M minority investment for a 4.99% stake, we are also looking at a decent market capitalization of $14B for XPEV, though the recent rally have already brought the latter to over $17B at the time of writing.

While no further detail has been offered, it remains to be seen if this new stake involves insider selling or further shareholder dilution. We suppose more detail may be obtained during the Chinese automaker's upcoming earnings call by late August 2023.

While XPEV is in no urgent need of a capital boost, the $700M may temporarily bolster its balance sheet as well, based on its FQ1'23 cash/ short term investments of $3.59B (-20.7% QoQ/ -35.4% YoY), without needing to increase its reliance on long-term debts of $1.02B (+11.1% QoQ/ +45.6% YoY).

For now, we believe XPEV may report an excellent FQ2'23 top and bottom expansions, while beating consensus estimates of $768.3M (+30.8% QoQ/ -30.1% YoY) and -$0.34 (+15% QoQ/ +27.6% YoY) respectively.

This is mostly attributed to its expanding June 2023 deliveries of 8.62K EVs (+14.8% MoM/ -43.6% YoY), with FQ2'23 total deliveries of 23.2K (+27.2% QoQ/ -32.5% YoY), easily surpassing its previous guidance of 21.5K at the midpoint.

Perhaps this has also contributed to the XPEV stock's soaring cadence over the past few weeks, especially due to its deteriorating gross/ operating margins and continuous cash burn thus far.

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

XPEV 1Y EV/Revenue

For now, XPEV's valuation at NTM EV/ Revenues of 2.87x appears somewhat fair, compared to its 1Y mean of 1.36x and the automotive sector median of 1.36x.

This is because the automaker is expected to record an impressive top-line expansion at a CAGR of +36% through FY2025, improved compared to BYD's ( OTCPK:BYDDF ) at 28.7% and TSLA's at +25.4%, though still lagging behind NIO's ( NIO ) at +37.5%.

Combined with the optimistic partnership with VWGAY, it is unsurprising that XPEV has also more than doubled since our previous article, though failing to break out of its previous resistance levels of $25s. However, here is where we prefer to be cautious, take a step back, and rate the stock as a Hold, despite its fair valuation.

With the Chinese based automaker remaining unprofitable, it remains to be seen if its premium valuations may hold through the uncertain Chinese macro economic recovery. Due to the overly fast and furious rally, it also appears that some investors have also opted to take their gains off the table, with the intermediate support levels of $19s failing to hold.

Therefore, with the XPEV stock still highly volatile, we do not recommend anyone to chase the rally here as well, especially with the elevated short interest of 9.51% at the time of writing.

While the stock does not appear to be over valued, bottom fishing investors may consider adding between $12 to $15, if not $9 for an improved margin of safety, based on the stock's downward cadence over the past few days.

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