XPeng (NYSE: XPEV) investors have had a tough exit in recent months. The Chinese electric vehicle giant faces many headwinds. It’s been tough for the whole industry, but XPeng has been particularly hard hit. Its October shipments report reflects its mounting difficulties and the worrying state of the Chinese economy. Despite its relatively compelling long-term case, it’s hard to bet on XPEV stock, given its current challenges and bleak outlook. Therefore, we are bearish on XPEV stock at the moment.
XPEV stock has been battered over the past 12 months, in line with the stock market. It released its second-quarter results a few months ago, where it missed analysts’ expectations by a considerable margin and issued guidance for lower-than-expected third-quarter shipments. However, the difficult macroeconomic conditions and production stoppages caused by the coronavirus in China have severely impacted its results.
Additionally, we saw how its gross and vehicle margins fell during the quarter. Gross margins declined 1%, while vehicle margins fell 1.9% from the prior year period. The company attributed lower margins to higher operating costs, particularly battery and raw material costs.
As a result, XPEV stock is trading at multi-year lows and looking more attractive than ever. It is trading at around 1.3 times forward sales estimates, more than 50% lower than last year’s estimates. However, its troubling outlook and near-term challenges point to more carnage for the stock.
Interestingly, XPEV stock even has a smart score of 3 out of 10, indicating that the stock is likely to underperform the market going forward.
Zero COVID policy cripples China’s economy
In the second quarter of 2022, disruptions caused by COVID-19 and industry-wide supply chain constraints were a key theme for China’s electric vehicle sector. However, the situation improved remarkably after China lifted lockdown orders in Shanghai in June. In the months that followed, production continued to increase rapidly and most companies in the sector were able to make a comeback.
However, XPeng’s shipments over the past two months have lagged its performance compared to the same period last year. In line with the country’s zero-COVID policy, its main manufacturing cities in Hefei and Xi’an had to shut down several areas, which had a significant impact on the production of electric vehicles. The disruptions have led to a massive drop in deliveries for all electric vehicle companies operating in China.
Investors appear to be losing faith in China’s ability to navigate an increasingly complex economic landscape. A package of supportive central government policies has failed to bolster confidence in the country’s property and electric vehicle markets, and renewed concerns over the government’s commitment to zero-COVID have added to investor anxiety. The sale was also prompted by fears of a macroeconomic crisis in China that could stall demand for electric vehicles (EVs) in the world’s biggest EV market.
Although the consensus points to a more conducive environment going forward, it will take a considerable amount of time before the markets return to winning ways. Supply chain bottlenecks will continue to be a persistent factor, which will continue to weigh on production and deliveries for EV companies. Supply and demand levels may not come into balance until mid to late 2023 or 2024. In the meantime, electric vehicle stocks and other Chinese stocks are likely to face incredible volatility. .
Is XPEV stock a good buy, analysts say?
As far as Wall Street is concerned, XPEV stock maintains a moderate buy consensus rating. Out of nine analyst ratings, six buy, two hold and one sell ratings have been assigned over the past three months. The average XPEV price target is $24.65, implying an upside potential of 173.9%. Analyst price targets range from a low of $3.18 per share to a high of $41 per share.
Takeaway: Avoid stock XPEV
The recent selloff in global markets has been particularly brutal for Chinese equities. While this may imply an attractive entry opportunity, several factors point to heightened volatility over the coming months. Regulatory and geopolitical risks are looming, while the outlook for global economic growth is rapidly deteriorating. As such, investors should exercise caution when it comes to Chinese electric vehicle stocks.
XPeng is currently in a difficult situation and the company is not doing enough to address internal issues. Investors worry about demand risks, cost and operating inefficiencies, supply chain constraints and a lack of clarity on forward strategies. Although it has its growth catalysts, such as the G9 SUV, XPEV is probably best avoided for now.