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XPeng (XPEV) Doubles in 6 Months: Ripe for Profit Booking?

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The electrification wave is sweeping the global auto industry, and nowhere is this more evident than in China — the frontrunner in the electric vehicle (EV) revolution. Last year, China saw registrations of over 5.92 million new passenger plug-in electric cars, accounting for a massive 60% of global sales. Forecasts by Mordor Intelligence peg the growth of the country's EV market from $260.84 billion in 2023 to an impressive $575.56 billion by 2028, representing a CAGR of 17.15% during the forecast period (2023-2028).

XPeng Inc. (XPEV - Free Report) — one of the notable players in China’s EV industry — has witnessed a phenomenal 101% growth in its shares in the past six months, piquing investors’ interest. So, what’s fueling the surge? And most importantly, does it make sense to cash out or hang on for more upside potential?

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Impressive Product Lineup

XPeng’s fleet includes models like the P7, P5, G3, G9, and the latest entrant, G6. The latter quickly gained traction, becoming a bestseller in its category shortly after its June debut. This quick success has positioned XPeng as a major contender against EV king Tesla (TSLA - Free Report) in the Chinese market. The G6, the inaugural model on the SEPA 2.0 architecture, aims to reduce development cycles by a fifth. XPeng’s G6, though equipped with limited autonomous capabilities akin to Tesla's Full Self-Driving system, comes at a price point 20% lower than Tesla's Model Y base version.

Delivery Growth & Upbeat Guidance

While XPeng is yet to turn a profit, there are signs of promise. Total vehicle deliveries for the second quarter of 2023 reached 23,205 units, a 27.3% increase from the first quarter. XPeng deliveries hit 13,690 in August, up 24% and 43% sequentially and yearly. This marked the seventh straight month of sequential gains. Deliveries of the G6 model last month totaled 7,068 units, up nearly 80% from July, surpassing 10,000 deliveries in just 45 days since its launch.

Predictions for the third quarter are bullish. XPeng expects third-quarter deliveries in the band of 39,000-41,000 vehicles, signaling a year-over-year increase of 31.9-38.7%. Revenues are envisioned between RMB 8.5 and RMB 9 billion, indicating a year-over-year rise of 24.6-31.9%.

Expansion Efforts Augur Well

The expansionary ambitions of XPeng are evident with its foray into European markets. Starting with deliveries of its G3 in 2020 and P7 sedan in Norway in 2021, the automaker further cemented its European presence by striking retail deals in the Netherlands, Sweden, and Denmark in 2022. This year, XPeng began sales of its G9 flagship SUV and an updated P7 performance sedan in four European countries — Denmark, the Netherlands, Norway, and Sweden.

By next month, the company aims to open six stores in these countries — one in Denmark, two in the Netherlands, and three in Sweden. Additionally, XPeng is integrated with the Plugsurfing and Shell Recharge EV charging networks, providing access to more than 400,000 charging points across 32 European countries.

The company is eyeing further expansion into Germany, France and Britain in 2024, starting with the G9, P7 and G6 models.

Strategic Collaborations

Highlighting its credibility, XPeng announced a strategic alliance with Volkswagen (VWAGY - Free Report) , with the latter pumping in $700 million to co-develop Volkswagen-branded EVs utilizing XPEV’s ADAS technologies for the Chinese market. This collaboration, besides being a financial boon, serves as a testament to XPeng's advanced technological capabilities. The deal with Volkswagen might enable XPeng to generate profits and positive free cash flow by mid-decade.With Volkswagen's backing, XPeng is better positioned to compete on a global scale and contribute to the transformation of the automotive sector. It also serves as a testament to the attractiveness of XPeng’s innovations in the eyes of established industry players, underscoring the company's potential to reshape the future of transportation.

In another notable development, XPeng acquired Didi Global's smart-car development business for $744 million in an all-stock deal last month. XPeng and Didi will collaborate on "Project MONA" to target the mass market with an affordable EV priced around $20,500 by 2024. The partnership seeks to exploit Didi's vast vehicle data to boost XPeng's autonomous driving capabilities. It encompasses a wide range of activities, including fleet management, marketing, insurance, charging infrastructure, robotaxis and expansion into international markets. Despite significant R&D investment, market penetration in China's new energy vehicle segment was a mere 2.1% in 2022. A partnership with Didi would give XPeng a chance to engage with a larger user base.

Technological Prowess

We like XPeng’s commitment to innovation and continuous R&D spending to bolster its standing in the market and fortify EV game. The company's full-stack proprietary autonomous driving technology and advanced hardware configuration give it a competitive edge. XPeng's in-car intelligent operating system, Xmart OS, offers a wide range of smart connectivity features, including artificial intelligence, smart navigation, an app store and voice-controlled smart mobility experiences.

The company’s XPILOT 3.5, featuring a City Navigation Guided Pilot (NGP), empowers XPeng vehicles to execute lane changes, adjust speed, overtake and navigate city roads, extending beyond its initial highway-focused functionality. XPILOT competes directly with Tesla's Autopilot in the realm of advanced driver assistance systems.

The company also rolled out an over-the-air upgrade to the Xmart OS operating system, adding 82 new features to its vehicles. The firm’s smart EVs’ powertrain, comprising a battery system, electric drive system, high-voltage system and vehicle control unit, enables improved digitization, drivability, as well as power efficiency. 

What to Do With XPEV Shares?

XPeng’s current P/S ratio of 2.27, while higher than the broader industry, is considerably lower than its five-year high of 28.09 as well as the median of 3.60.While the company is currently incurring losses, this is a common challenge among various EV pure plays. As XPeng scales up its production, it is expected to gradually reduce costs and improve its financial performance.

Well, XPeng is indeed going the extra mile to bolster its standing in the burgeoning EV market. Undeniably, XPeng faces stiff competition from heavyweights like Tesla as well as domestic peers like NIO and Li Auto. Yet, its aggressive growth trajectory, coupled with an unwavering focus on innovation and customer experience, places it in a promising position.

With the mission of bringing Smart EVs to the China auto market through continuous innovation in core vehicle systems, driverless technology and smart connectivity, XPeng is set to become a name to reckon with in the coming years.  For existing shareholders, staying invested in XPeng seems prudent and for potential investors, buying during the dips might be a savvy move.

XPEV currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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