To The Moon

Summary

• Mr. Market has prematurely reacted to the Israeli news with a -$1.62B correction in XPEV's Enterprise Value then, since the estimated value of the deliveries is only at $43.87M.

• Even if these deliveries are eventually not paid for, we are not overly concerned, since they only make up a small part of the automaker's FQ3'23 deliveries of 40K units.

• While XPEV may achieve improved operating/production scale by FY2024, we do not expect to see its gross margins to drastically improve by FQ3'23 yet, based on the management's commentary.

• Investors must also note that the automaker has guided continuous investments in its R&D efforts "related to the development of new vehicle models," implying its intensified cash burn rate moving forward.

• We maintain our view that the XPEV stock may still be very volatile, attributed to its elevated short interest of 10.33% at the time of writing, with any gains potentially negated by volatile short traders.

New cars transportation # 3

Lya_Cattel/E+ via Getty Images

We previously covered XPeng (NYSE:XPEV $XPeng Inc.(XPEV)$ ) in August 2023, discussing its improved prospects as the management gained a vote of confidence from Volkswagen (OTCPK:VLKAF) (OTCPK:VWAPY) (OTCPK:VWAGY).

The automaker might also benefit from the improved supply chain and lower barrier of entry to the EU market, boosting its long-term prospects compared to its Chinese peers.

In this article, we will be discussing Mr. Market's over-reaction to XPEV's (likely unpaid for) deliveries to Israel, expanded production ramp up through September 2023, and mixed FQ2'23 financial results, implying that its reversal may have already begun.

The XPEV Investment Thesis Seems Improved Here - Nearer To Our Expectations

For context, XPEV delivered 750 vehicles to Israel in September 2023, supposedly a great achievement due to the company's successful international expansion.

Unfortunately, no one may have guessed that Israel will meet a conflict by October 07, 2023, triggering massive uncertainties in the automaker's performance. The biggest question is probably whether XPEV has been paid for the delivery.

Interestingly, Mr. Market has prematurely reacted to the news, with the XPEV stock plunging by ~12%, or the equivalent of -$1.62B in Enterprise Value. While the stock has somewhat recovered since then, there is still a -$0.99B gap at the time of writing, implying the wider market's pessimism.

We believe that the sell-off has been overly done since the estimated value of the Israel deliveries is only at $43.87M. This assumption is based on a midpoint MRSP of $58.5K, against P7's MSRP of $54K and P9's MRSP of $63K for global export, since no detailed breakdown has been reported thus far.

Even if these deliveries are eventually not paid for, we are not overly concerned, since they only make up a small part of XPEV's FQ3'23 deliveries of 40K units (+23.2% QoQ/ +35.2% YoY).

In addition, with the automaker already hitting its September 2023 delivery target of 15K units, sustaining the growing delivery trend thus far, it appears that the management may be able to achieve its peak monthly delivery target of 20K units in FQ4'23.

As a result of the seemingly robust consumer demand and ramped-up deliveries, it appears that the management may just be able to execute a slow but certain reversal moving forward.

Then again, investors must also note that the stock is not suitable for those with low conviction, since XPEV still reports relatively underwhelming FQ2'23 earning results.

The automaker reports higher revenues of 5.06B Yuan (+25.5% QoQ/ -31.9% YoY) but impacted gross margins of -3.9% (-5.6 points QoQ/ -14.8 YoY), mostly attributed to:

The inventory write-downs and losses on inventory purchase commitments amounting to RMB0.2 billion related to the model G3i... The increased promotional spend on some of the older models that we have... and the expiry of new energy vehicle subsidies. That is partially offset by lower battery costs that we've seen in the second quarter. (Seeking Alpha)

While XPEV may achieve an improved operating/ production scale by FY2024, we do not expect to see its gross margins drastically improve by FQ3'23 yet, since the management has guided "some level of production scheduled for G3i (with lower margin contribution) in the third quarter," with things likely to lift only by FQ4'23, if not longer.

Investors must also note that the automaker has guided continuous investments in its R&D efforts "related to the development of new vehicle models," implying its intensified cash burn rate moving forward.

While XPEV appears to have improved liquidity at 27.73B Yuan (+12.4% QoQ/ -14.1% YoY) by the latest quarter, sustaining its operations for the next few quarters thanks to the $700M VWAGY deal, investors must also be very patient for the stock's eventual recovery.

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

XPEV Valuations

XPEV Valuations

Seeking Alpha

For now, the only metric that we may use to measure the XPEV's stock performance is the FWD EV/ Sales of 2.94x, since the automaker remains GAAP/ adj EPS unprofitable.

This number demonstrates the much needed correction in its valuations from the 2020 peak of 28.04x, 2021 peak of 11.89x, and 2022 peak of 6.94x, nearer to the sector median of 1.12x.

However, investors must also note that XPEV's FWD EV/ Sales of 2.94x remains elevated compared to its direct competitor, NIO (NIO) at 1.95x, potentially implying that the correction may not be over yet.

This is because the consensus has estimated that the former may generate a top-line expansion at a CAGR of +38.7% through FY2025, similar to the latter's growth rate at +36.4% within the same time frame.

XPEV 1Y Stock Price

XPEV 1Y Stock Price

Trading View

Nonetheless, XPEV appears to have established a notable trading trend since July 2023, with a support level of $15s and a resistance level of $18.50.

Assuming that the management delivers on its peak delivery guidance/ positive gross margins in FQ4'23 and positive Free Cash Flow profitability by 2024, we may see this range hold moving forward.

With the stock also moderating from its previous peak nearer to our previous buy zone at $15s, we are cautiously rating XPEV as a Buy.

However, this buy rating is also only suitable for investors with higher geopolitical risk tolerance and long-term investing trajectory, since the management expects to achieve operating break-even only by 2025.

Even then, we maintain our view that the XPEV stock may still be very volatile, attributed to its elevated short interest of 10.33% at the time of writing, with any gains potentially negated by volatile short traders.

Investors beware.

Source: seeking alpha