VWAPY - XPeng: Positive Volkswagen Signals

2023-07-27 15:37:48 ET

Summary

• XPeng Inc. announced a major investment partnership with Volkswagen.
• The Chinese EV manufacturer has forecast a sharp rise in deliveries for Q4, though management has a history of not meeting targets.
• XPEV stock has reasonable upside at $20, but downside risk does exist on further volatile monthly delivery totals.

In a somewhat surprise move, XPeng Inc. ( XPEV ) announced a major strategic investment from a large partner. The Chinese electric vehicle ("EV") company has struggled the last few years to generate consistent growth, yet Volkswagen AG ( VWAGY ) made a big strategic investment in the technology of XPeng and the access to the Chinese market. My investment thesis remains Bullish on the stock after already doubling off the lows, but the easy money has been made.

Volkswagen's Big Investment In XPeng

Volkswagen agreed to invest a shocking $700 million in XPeng to acquire 4.99% of the business. The companies plan to jointly develop two B-class BEVs (battery EVs) under the Volkswagen brand, but the start of production won't occur until 2026.

The deal was done at $15 per share, and XPeng has quickly surged to over $20 on the news. The deal follows a large investment by Abu Dhabi-linked CYVN Holdings in NIO ( NIO ) with a similar investment of $739 million.

XPeng ended Q1 with a cash balance of $5 billion, so the company didn't necessarily need a capital infusion. The Chinese company is losing substantial amounts of cash on a quarterly basis due to the inability to consistently sell vehicles to targets.

The investment partnership is labeled as a strategic technical collaboration. Volkswagen could possibly want access to the autonomous driving capabilities of XPeng. The Chinese company just announced the AI Valet Driver service available in Q4, with City NGP already available in the top 4 cities in China offering high-level ADAS services for complex urban driving scenarios. By the time this partnership starts production in 2026, XPeng will have likely tested out far more self-driving technology than Volkswagen in Europe.

Still Struggling

XPeng had just reported June month vehicle sales of 8,620 units . The company has grown deliveries for 5 months in a row and just announced the launch of the G6 Ultra Smart Coupe SUV at the end of June.

The consistent problem with the XPeng story is the constant failure over the last couple of years to grow monthly vehicle deliveries. Top auto manufacturers are able to constantly grow deliveries.

Most notably, the June vehicle delivery levels were nearly 50% below the 15,295 units delivered back in 2022. Not to mention, XPeng hit a delivery record back in December 2021, which is now over 18 months ago.

The company working with Volkswagen might help solve some of the volatile monthly numbers due to constant product launches. XPeng and other Chinese EV manufacturers constantly launch new models, unlike Western automakers that regularly improve existing models. Some of the volatility issues are likely due to customers delaying car purchases while waiting for the newest model to arrive.

The stock now has a market cap of $20 billion factoring in the ~47 million shares issued to Volkswagen. Those shares alone now contribute nearly $1 billion to the valuation due to the 38% rally above the acquisition price.

XPeng will definitely rally further since the stock traded to $40 back in 2022. The valuation equation no longer favors aggressive long positions, and investors loading up under $10 might want to take some profits here.

The company has, to now, delivered consistent growth in order to warrant vastly higher prices. In addition, the Chinese EV manufacturer remains highly unprofitable, and progress on this front is necessary to justify higher prices. The inconsistent monthly vehicle deliveries and the competitive pressures in China question a smooth path to growth and reaching cash flow positive.

The company guided to monthly vehicle deliveries topping 15,000 and the Volkswagen investment could signal the goal of reaching 20,000 by Q4 could be possible. Analysts forecast sales soaring to record quarterly levels in Q4 of $1.8 billion, and investing alongside Volkswagen would've been very timely under this scenario.

Takeaway

The key investor takeaway is that the big investment partnership with Volkswagen is a very positive scenario for XPeng shareholders. The stock isn't easy money here, with the potential to retest the recent lows below $10 on a failure to reach vehicle delivery targets. Our view is that a retest of the 2022 highs is likely on investor hype.

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