To The Moon

Thesis

We updated investors in ourprevious articleon XPeng Inc. (NYSE:XPEV) to be cautious, as we gleaned a significant price top as the market led investors into XPEV's June highs.

The market has since digested that momentum surge fromits May lows with breathtaking ruthlessness, sending XPEV spiraling toward a record low in October 2022. As such, XPEV has underperformed its peers significantly since our previous article, as it fell more than 75% from our caution.

While we had expected a steep fall, we didn't expect such a massacre. We gleaned that the market had not sent XPEV into a capitulation move. Instead, it was a clear de-rating in Chinese stocks that impacted Chinese equities broadly, with XPEV taking the brunt of the selling.

Our assessment suggests that investors could be pulling out of Chinese stocks in droves, reacting to the uncertainties from the Biden Administration's export restrictions on China's EV industry developments in autonomous driving.

As such, we believe it has driven more investors to flee to the sidelines, adopting a "sell now, ask questions later" as they parse the potential ramifications of Xi's unprecedented third term in office.

Therefore, we continue to urge caution among investors looking to buy this steep selloff. Notwithstanding, while XPEV has fallen to valuations that could seem highly attractive to some buyers, we believe the de-rating is significant. Hence, XPEV could continue to hobble in a consolidation pattern if sustained buying interest does not generally return toward Chinese stocks.

Coupled with its unprofitable business model, the challenges are magnified, as China could be moving into a period of significantly slowing growth.

As such, we reiterate our Hold rating on XPEV.

Broad De-rating in Chinese Stocks

Data byYCharts

As seen above, XPEV led its Chinese EV peers in their decline over the past three months. Accordingly, XPEV posted a 3M total return of -70.3%. However, even China's profitable and well-integrated EV leader BYD Company (OTCPK:BYDDF) couldn't avoid the broad de-rating, as it lost 31.7%. Furthermore, NIO Inc. (NIO) and Li Auto (LI) also posted significant losses, but well below the damage inflicted on XPeng investors.

Even an insider buy by XPeng CEO He Xiaopeng in September couldn't lift XPEV from its malaise. He reportedly "spent about $30 million" buying at an average price of $13.58. However, investors who followed the CEO's insider purchase endured a further 40% decline.

The de-rating is so massive that China's leading internet behemoths Alibaba (BABA) and Tencent (OTCPK:TCEHY) also lost more than 30% over the past three months, breaking below critical support levels.

Hence, we believe investors are pressing to know whether it makes sense to bet on a rebound in XPEV from the current levels.

XPeng's Valuation Has Been Slashed

XPEV NTM Revenue valuation trend(TIKR)

XPEV's NTM revenue multiple has fallen from a high of 3.93x to 0.55x over the past six months.

It's well below its auto peers' median of 1.25x (according to S&P Cap IQ data) and markedly below its Chinese EV peers, as shown above.

As seen above, the market sent XPEV into a selling overdrive in September, as its valuation trend deviated from its peers. Hence, we postulate that the market has de-rated XPEV markedly.

We cannot determine why the market has battered XPEV ahead of its peers, even though it's still expected to post solid revenue and adjusted EBIT growth through FY25.

It's not possible to nail down a particular reason. But, we highlighted in aprevious articlein 2021 that XPeng needs to ramp up its production significantly to achieve scale efficiencies, given its lower-priced target markets.

However, we noted that BYD has been makingsignificant inroadsin the mass market segment in China in 2022. Even Tesla's (TSLA) former Board member Steve Westly accentuated in a recent interview: "For the first time, I think there is a real challenger [for Tesla], and that challenger's name is BYD."

Therefore, we postulate that the market could have de-rated XPEV in anticipation of more significant challenges from BYD, which is obviously a highly formidable competitor.

Moreover, we believe the market could have moved to "separating the wheat from the chaff" mode, as it anticipates more consolidation in China's EV industry.

CEO of leading smartphone maker Xiaomi (OTCPK:XIACF), Lei Jun, accentuated that the "competition will be brutal." He telegraphed that Xiaomi is on its way to partake in the EV market and sees itself competing among the top five brands in the world. He also highlighted that at maturity, "the world's top five brands will have more than 80 percentof the market share, and the only way for Xiaomi to succeed is to be one of the top five and ship more than 10 million units a year."

Notably, NIO CEO William Li also highlighted recently that the EV maker aims to be among theworld's top five brandsby 2030. With Tesla and BYD likely among the frontrunners and Volkswagen (OTCPK:VWAGY) "in a solid third place," according to Westly, investors have just two more places up for grabs. Don't forget, we have General Motors (GM) and Ford (F) vying for global domination as well. It would be an intense battle, so the market seems to have "discarded" XPEV's ambitions.

Is XPEV Stock A Buy, Sell, Or Hold?

XPEV price chart (weekly)(TradingView)

After forming its astute bull trap in June, the market sent XPEV into freefall as it reached record lows in October 2022.

We gleaned that XPEV is in "no man's land," with bearish momentum pushing past any reasonable support zones easily. We had anticipated its "support turned resistance" level to hold. However, the market pushed away that idea, as sellers forced more downward pressure with no buyers in sight.

While XPEV could potentially consolidate after the selling pressure subsides, we don't encourage investors to buy the dips. Taking out its $17 support level was critical, suggesting that the market has de-rated XPEV decisively. The technical damage is highly significant, and it would take a gargantuan effort to reclaim that zone. We believe that zone is critical for XPEV to retake its bullish bias, but it looks highly unlikely for now.

As such,we reiterate our Hold rating on XPEVand urge investors to stay away.