XPeng Inc. (XPEV, Financial) is a Chinese electric vehicle manufacturer that has been growing rapidly in recent years. The company has made its investors very happy with a return of about 96% in 2023, around 65% for the past month and around 30% for the past five days. In contrast, the stock has recorded a loss of nearly 20% over the past year.
On Wednesday, a major update sent shares about 27% higher, closing around $19.46. The volume also increased to 38.08 million shares, which compares to its average daily volume of approximately 17.42 million.
Despite the rally, investors should still be cautious as the company has some risks.
Volkswagen invests in XPeng as a strategic long-term partnership with multiple benefits
Investors of XPeng got an unexpected gift in the form of a stock surge as Volkswagen AG (XTER:VOW3, Financial) announced it is investing $700 million into XPeng, giving it to have a 5% minority stake as well as a seat as an “observer” on its board.
The partnership will help the German car manufacturer develop two VW-branded mid-sized electric vehicles, one of which is to be launched in China in 2026.
Volkswagen has seen weakening sales in China, so it is a smart move to partner with a major local Chinese EV manufacturer rather than try to compete with it. Both companies will benefit from the shared technologies. Further, the investment is a major vote of confidence in XPeng’s brand name.
XPeng sells its P7 performance sedan and its G9 crossover in European countries like Denmark, Norway, the Netherlands and Sweden. Further, the company announced it is expanding into Israel, creating a diversified geographical area of potential customers. It expects to start selling its electric vehicles in Israel in the fourth quarter of this year.
Important business advantages
The company has many business advantages that have contributed to its success, including strong technology capabilities, attractive designs, scalable production capacity and strong financial backing.
XPeng is one of the few EV companies that develops its own advanced driver assistance and operating systems. This gives it a significant advantage over its competitors, who have to rely on third-party technology. Further, XPeng's ADAS system, called XPILOT, is one of the most advanced in the world. It encompasses features such as automatic lane keeping, adaptive cruise control and traffic jam assist.
Its vehicles are known for their attractive designs. The company's latest model, the P5, has been praised for its sleek and modern styling. The car also has a drag coefficient of 0.22, which is one of the lowest in the world for an EV. This helps to improve the vehicle's range and efficiency.
The company has a scalable production capacity that allows it to meet the growing demand for its vehicles. XPeng has two manufacturing plants in China, and it is planning to build a third plant soon. This will allow it to produce up to 500,000 vehicles per year by 2025.
XPeng has strong financial backing from investors such as Alibaba Group Holding Ltd. (BABA, Financial) and Tencent Holdings Ltd (TCEHY, Financial). This gives the company the resources it needs to continue growing and innovating. In 2021, for example, it raised $1.5 billion in a funding round led by Alibaba. This funding were used to help XPeng expand its production capacity, develop new technologies and enter new markets.
Overall, XPeng has important business advantages that have contributed to its success. The company also benefits from the strong growth of the Chinese EV market as the government has been providing subsidies for EV purchases, which has helped to drive demand.
Financials and valuation
One of the worst feelings in investing is the fear of missing out, especially when you ignore the fundamentals of a stock and chase the price fearing it will move higher and you will miss an opportunity. In times of strong momentum, stocks can continue to move higher for absurd reasons. XPeng now has a catalyst that is enough to fuel a potential rally over the next several days. However, its fundamentals are not good.
Based on historical ratios, past financial performance and analsyts' future earnings projections, shares of XPeng have a GF Value of $62.58, suggesting there could be a value trap.
Further, the EV maker was unprofitable between 2018 and 2022 and has recorded widening net losses. In 2021, it reported a net loss of $5.86 billion and a net loss of $10.63 billion in 2022.
Another worrisome metric is the low Piotroski F-Score of 1 out of 9, which in most cases implies poor business operations. Additionally, the Altman Z-Score of 1.25 is in the distress zone. This implies bankruptcy is possible in the next two years.
The company is also not generating positive free cash flow. In 2021, it reported free cash flow of -$4.09 billion and free cash flow of -$13.91 billion in 2022.
Final thoughts
XPeng and Volkswagen have entered a very important partnership that should be good for both companies' future profitability. Until we see this occur, however XPeng remains a high-risk investment.
