XPEV - XPeng: Inflection Point Ahead

2023-03-17 15:44:27 ET

Summary

• XPeng Inc. reported mixed Q4 2022 results and guidance for 2023.
• The CEO was very bullish on the traffic around the P7i launch and the potential of the new G6 vehicle.
• XPEV stock is cheap at 1x '23 sales targets with plenty of catalysts for growth, while the cash balance will limit downside risk if the company fails to hit targets.

The Chinese EV manufacturer reported generally mixed Q4'22 results , but the market is more focused on what XPeng Inc. (XPEV) projected for 2023. The Chinese market has only slowly reopened, in a major disappointment to investors expecting a quick ramp-up in demand. My investment thesis remains ultra-Bullish on the stock trading at the recent lows, while the rebound opportunity remains massive.

Inflection Point

XPeng had a horrible end to 2022 due to internal problems and covid lockdowns in China. The company delivered 120,757 vehicles for 23% growth due primarily to a big initial ramp in early 2022 that quickly faded.

The company just reported Q4 2022 results , where revenues actually plunged from the 2021 levels. XPeng has reinforced a history of inconsistent growth and a major failure in hitting financial targets.

The quarterly revenues were only $750 million, down 40% on the year. The important vehicle gross margin was just 5.7% with a total gross margin of only 8.7%.

XPeng needs to produce a far larger margin in order to generate profits. The Chinese company lost $320 million in the last quarter alone.

The company has guided to the following vehicle delivery numbers for Q1'23:

• January '23 deliveries - 5,218
• February '23 deliveries - 6,010
• March '23 delivery estimate - 6,782 to 7,782
• Q1'23 total delivery estimate - 18,000 to 19,000.

The problem with these numbers is that each monthly vehicle delivery number is down from the monthly totals in 2022. XPeng has seen a monthly sequential increase in deliveries providing some positive indications for a return to sustainable growth.

The company has had several months where monthly vehicle deliveries topped 15,000, double the March target. In the past, these monthly deliveries quickly collapsed in following months.

The stock is rallying due to some positive comments from CEO He Xiaopeng on the Q4'22 earnings call regarding customer traffic:

I'm pleased to see our in-store traffic and test driving volume both hit new heights in recent months following the P7i launch. This new products, smart features, dialing design and performance among other clear advantages in livery with similar products were well received among customers. Amid the market's prevailing weakness in new order intake, our results outperformed the market. Our new order intake in February increased 100% over the previous month. With the strong momentum of P7i orders, following its official launch, we expect to see a considerable month-on-month growth of total new order intake in March. This marks an initial success following our comprehensive transformation, which has also boosted our company morale.

XPeng Inc. is in the midst of transforming the sales department to focus on efficiency in the sales process while leaning into new product innovation and key product differentiations like autonomous driving. The big question with the comments from the CEO is whether this is truly an inflection point in the business or whether the new P7i is a hot car now to where competitive threats will make the orders fade prior to the next new vehicle launch.

XPeng will launch the new G6 with the most advanced electrification and smart mobility technologies to the 200,000 to 300,000 yuan ($30,000 to $50,000) priced NEV SUV market. In addition, the MPV will be launched in the 2H of the year.

Again, the CEO talked very positive about the G6 on the Q4'22 earnings calls, with the following statement:

Following the ramp-up of G6 mass production, we expect G6 monthly sales target to be 2x to 3x that of its P7 predecessor sales.

While the customer traffic sounded like a positive anecdote, the forecast for the G6 appears too bullish. The CEO has had a history of promoting aggressive vehicle targets that weren't hit. XPeng entered 2022 with a target for 300K vehicles and the CEO recently promoted a 2023 target of 200K vehicles before delivering the lowest quarterly vehicle level in Q1 since 2020.

Opportunity Ahead

The prime reason to buy XPeng at the multi-year lows is the massive opportunity ahead. The company has failed to generate much in the way of momentum in the last couple of years due to supply chain issues, Chinese covid lockdowns and internal problems, but the company has the ability to generate massive growth with strong product innovation and a more efficient sales force.

Analysts forecast substantial revenue growth over the period with revenues going from $3.9 billion in 2022 to $13.8 billion in 2025. The reason to buy XPeng is this opportunity for massive growth while the stock trades at the lows.

Of course, the Chinese EV manufacturer has struggled to hit recent financial targets. The company does have a $5.55 billion cash cushion to correct the ship in the next couple of years.

The opportunity is definitely for the combination of a Chinese economic rebound to occur alongside XPeng actually turning around the business for sustainable growth now. XPEV stock only trades at 1x sales targets, and companies with the above growth targets typically trade at multiples of sales.

Takeaway

The key investor takeaway is that XPeng Inc. continues to struggle, but the company is showing the initial signs of a lasting turnaround. The P7i has strong momentum and XPEV stock is exceptionally cheap for the opportunity ahead.

If XPeng is truly at an inflection point and the Chinese economy recovers, the stock will generate outside gains this year. If XPeng Inc. continues to struggle, the large cash cushion with the market cap at only $7+ billion with limit any downside risk.

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