Crazy Rally for NIO and XPeng! Should We Still Buy?

$NIO Inc.(NIO)$ $NIO-SW(09866)$ and $XPENG-W(09868)$ $XPeng Inc.(XPEV)$ have been on fire lately, with NIO soaring 48% over eight trading days and XPeng jumping 29% post-earnings!

Meanwhile, $Li Auto(LI)$ $LI AUTO-W(02015)$ has barely moved, highlighting just how impressive NIO and XPeng’s performance has been.

Why are NIO and XPeng surging? Can you still jump in?

Better Earnings Boost Shares

Let’s start with NIO. The stock kicked off its rally after its Q2 earnings report, which beat expectations. On the day of the report, the stock surged 14%, and then another 11% this Monday!

The surge is largely due to better-than-expected earnings. NIO’s Q2 revenue hit ¥17.45 billion, up 98.9% year-over-year, surpassing analyst estimates of ¥17.38 billion. The automotive gross margin came in at 12.2%, beating expectations of 11.53% and last quarter’s 9.2%.

NIO’s ability to maintain this gross margin is impressive, especially given the fierce competition in the domestic EV market. Both NIO and Li Auto have been discounting heavily, but NIO hasn’t sacrificed margins for sales.

In contrast, Li Auto’s gross margin for its automotive business dropped to 18.7% in Q2 from 19.3% in Q1, due to promotions and the introduction of its lower-priced L6 model.

For Q3, NIO's delivery guidance of 61,000-63,000 units is optimistic. If they hit the upper end, September’s deliveries could reach a record 22,326 units!

Launch New Models

On September 19, NIO’s second brand, ONVO, will launch its first model, the L60, with a starting price of ¥219,900. This is significantly cheaper than NIO’s main models and could be a hit, following the success of Li Auto’s L6.

XPeng is also on a roll with its Mona 03 model. Launched in August with a starting price of ¥119,800, the Mona 03 quickly gained traction, with 30,000 pre-orders in just 48 hours! They’re now seeing over 2,000 new orders daily and have had to adjust production schedules to meet demand.

Recent visits by reporters to dealerships revealed that XPeng’s total orders for the Mona 03 have exceeded 70,000 units, with weekend test drives fully booked and requiring advance reservations. The signs are clear: the Mona 03 is a hit.

Loss and Valuation

For new car makers, sales are crucial. As long as sales keep climbing, the financial outlook will continue to improve.

In terms of losses, XPeng reported a net loss of ¥1.28 billion in Q2, a significant drop from ¥2.8 billion a year ago. Nio’s Q2 net loss was ¥5 billion, down from ¥6.06 billion last year.

Valuation-wise, Nio’s price-to-sales ratio is just 1.1x, slightly higher than Li Auto’s 1.03x. Given Nio’s stronger sales growth, its valuation isn’t too high compared to Li Auto.

Xpeng’s current price-to-sales ratio is 1.6x, notably higher than both Nio and Li Auto. This has led to recent gains lagging behind Nio’s, but with the Mona 03 expected to drive significant revenue growth, this valuation seems reasonable.

In summary, NIO and XPeng are finally seeing some much-needed positive momentum.