XPeng Q1 gains: Look beyond near-term issues (NYSE: XPEV)

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XPeng (NYSE: XPEV) recently released its first quarter 2022 results and provided a somewhat weak outlook for the next quarter, but the long-term outlook remains good and its shares are undervalued, so it remains an excellent play long-term in the electric vehicle sector.

As I’ve discussed in previous articles, I’m bullish on XPeng over the long term, as the Chinese startup appears to be well positioned to benefit from the secular growth trend in the electric vehicle (EV) market in China and the world. abroad, expected in the years to come.

Analysis of XPeng Q1 2022 results

XPeng recently released its earnings related financial results for the first quarter of 2022, beating estimates on both the top and bottom, according to data from Bloomberg. Its revenue was $1.17 billion in the quarter, 1% ahead of estimates, while its EPS loss of $0.15 was 9% better than expected.

During the first quarter of 2022, XPeng shipped nearly 35,000 units, representing a 159% year-over-year increase, but a decline from the prior quarter as the company was impacted by the Covid lockdowns in China and supply chain constraints.

Total revenue of $1.17 billion in the quarter increased 153% from the same period of 2021, but decreased nearly 13% from the prior quarter. Considering that 94% of its total revenue comes from the sale of vehicles, the number of deliveries is a key factor in its revenue growth, a trend that is not expected to change for the foreseeable future.

Due to rising raw material and battery costs, vehicle margin decreased to 10.4% in the last quarter (compared to 10.9% in Q4 2021), showing that XPeng has had some struggling to pass on rising costs to its customers despite rising prices in recent months. Nevertheless, thanks to gains in its services business, XPeng was able to protect its margins as XPeng’s overall gross margin in the first quarter was 12.2%, a slight increase from the previous quarter and one percentage point from the previous quarter. above the same quarter of 2021.

This is very important because in order to break even in the coming years, XPeng needs to improve its operating leverage both by increasing production efficiency and the cost synergies achieved by having a higher scale, including in its sales network and charging stations.

In the first quarter of 2022, its net loss was $268 million, more than double that of the first quarter of 2021, as the company continues to invest in growing its business through R&D, expansion of its sales network and associated personnel, as well as higher marketing costs. Regarding its balance sheet, XPeng had approximately $6.5 billion in cash at the end of the quarter, which is sufficient to fund its growth over the next few years and therefore the current risk of shareholder dilution seems rather low. .

Like most of its peers, XPeng’s growth is being hurt by external factors affecting China’s auto industry, which led to a 42% drop in unit shipments last April compared to March, a temporary setback that is expected to affect negatively its unit in the second quarter. deliveries and revenue growth. Indeed, XPeng’s guidance was somewhat weak and below expectations, with the company expecting to ship between 31,000 and 34,000 units in the second quarter, down from its last quarter, while revenue is expected to be around 1.02 to 1.12 billion dollars, while the market was expecting some 1.24 billion dollars.

This weakness was largely expected due to the Covid lockdown in Shanghai, a situation beyond XPeng’s control and not concerning as demand for its cars remains robust and deliveries are expected to resume when restrictions are lifted in China. . Indeed, XPeng’s monthly new order volume hit a new record high in March and its total order backlog is also at historically high levels, boding well for increased unit shipments in the coming quarters.

Regarding its production, it is based mainly in Guangdong and there has been a successful containment after the resurgence of Covid-19 epidemics, allowing XPeng to resume double-shift production since mid-May, being a another positive factor for higher unit deliveries in the coming months. Beyond the impact of the Covid lockdowns, another factor impacting its production is the shortage of chips, also a factor that affects the entire automotive industry and may last for some time to come. XPeng has been building up inventory in recent months to better manage its supply chain, and is also building its own internal capabilities to be less reliant on third-party chip sources.

Regarding its product line, XPeng currently sells three models, while a fourth model (the G9) was introduced a few months ago and is expected to be launched in the third quarter and begin mass shipments in the fourth quarter of 2022. this is a large SUV. , which is an important market segment in China and will compete directly with from Tesla (TSLA) Model Y for example, therefore being an important model for XPeng to increase unit sales in the medium term by entering a new segment of the automotive market. Note that XPeng currently only offers one SUV model (the G3), which is a smaller SUV and not aimed at the luxury segment, so there is a lot of potential for market share gains with the G9, being given that XPeng was not represented in this important market segment and was unable to directly compete with Tesla or NIO (NIO).

In 2023, the company plans to launch two new models, one based on its Class B platform and the other based on the Class C platform, thus targeted at mass market segments. To distinguish itself from its competitors, XPeng plans to offer several advanced technological capabilities with these two new models, as well as an attractive design to attract a younger clientele.

This means that despite the current headwinds for unit sales growth, XPeng’s medium-term outlook is quite good from a product portfolio perspective and growth is expected to remain very strong over the next two to three years. .

XPEV Stock assessment and estimates

As with many growth companies, XPeng’s stock price has trended negatively over the past few months, although its growth remains strong and the long-term business outlook remains strong. Indeed, as the following chart shows, XPeng’s valuation has devalued significantly in recent months, dropping from a peak valuation of nearly 10x forward earnings in June/July 2021 to just 2.2x forward earnings. term nowadays.

Valuation of Xpeng shares

EV/multiple sales (Bloomberg)

This is a very undemanding assessment for a high-growth company like XPeng, showing that investor sentiment has changed dramatically for unprofitable companies over the past few months and further declines appear limited at this time. Even if valuation multiples remain at these low levels for the next few months, it is likely that XPeng’s stock may have bottomed on the back of expected higher earnings in the next 12-18 months as the company expands. its product offering.

According to analysts’ estimates, XPeng’s revenue is expected to nearly double in 2022 to around $6.3 billion, while for 2023 revenue is expected to increase to $10.5 billion and be close to $20 billion. ‘by 2025. This means that, assuming the same 2.2x forward sales multiple, XPeng’s fair value would be around $53 per share by the end of 2024, more than double its current price.

While currently investor sentiment towards high growth stocks is quite negative and valuation multiples are low, this is likely to improve if economic conditions and supply chain issues are resolved in the future. over the next two years, which would likely lead to a higher valuation. many. Over the past year, XPeng’s historical valuation multiple was close to 6x forward earnings, but assuming this was during a “bubble” period for growth stocks, a discount may be warranted. Assuming a 4x earnings multiple by the end of 2024, this would represent a fair value for XPeng stock of around $96 per share, well above its current price, showing that the upside potential of XPeng is quite significant if management executes its growth ambitions well over the next two to three years.

Conclusion

XPeng’s long-term outlook remains quite good, but investor sentiment is currently negative and focused more on short-term headwinds than the long-term picture. This creates a poor valuation and presents an excellent buying opportunity for contrarian investors, who can look past temporary setbacks and invest for long-term growth prospects. XPeng stock is currently undervalued and the upside potential over the next two to three years is excellent. So I think XPeng continues to be one of the best long-term players in the Chinese, and possibly global, EV market.

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