There’s no doubt that the optimism toward electric vehicle stocks went a bit too far. XPeng (NYSE:XPEV) stock was one of the prime examples.
Source: Andy Feng / Shutterstock.com
In a matter of weeks starting in late October, XPEV stock nearly quadrupled.
Certainly, electric vehicle stocks on the whole were rallying after U.S. elections. But, obviously, those elections had little if any impact on a Chinese EV manufacturer. And XPEV easily outpaced even its hot sector.
Indeed, I wrote at the time that the stock needed to settle down. It has. XPEV stock is off by more than half from those November highs.
And at these levels, the stock is getting interesting, as one of several EV names that have been hit overly hard by the sector-wide selloff. There has always been a lot to like about XPeng stock. Now, there’s a cheaper price too.
The Opportunity for XPeng
XPeng’s opportunity is enormous.
China remains the leading country for EVs, accounting for an estimated 41% of global sales last year. The 1.3 million units sold was only modestly behind all of Europe, and in the range of 15x the U.S. figure.
Adoption is only going to accelerate. Although the Chinese government has been inconsistent with its subsidies, it continues to support the industry. Beijing wants EVs to account for one-fifth of all vehicles sold by 2025.
Obviously, competition is stiff, from both Chinese and American companies. But XPeng is off to a tremendous start.
XPeng isn’t profitable yet. But that’s not a surprise. Startup costs are high, and the company hasn’t yet reaped the benefits of scale. According to a prospectus, it has manufacturing capacity for some 250,000 cars. Deliveries this year likely will be less than one-quarter of that total.
But growth has improved gross margins, which turned positive last year. Quite clearly, XPeng is on the right track.
And there’s plenty of reason to expect that growth will continue.
Again, the market is going to grow. For its part, XPeng appears to have government backing — no small edge in the centrally controlled country. In January, it inked a credit facility with a number of state-owned banks, providing access to 12.8 billion RMB (roughly $2 billion) in capital.
New models will boost results as well. This month, XPeng announced its third production vehicle: the P5. Notably, the P5 comes with lidar technology pre-installed.
Lidar is one of the most common and promising technologies for autonomous driving. And the software was developed in-house by XPeng itself. That’s a big competitive advantage and valuable intellectual property.
It bears repeating: competition is going to be stiff. But what we’re seeing from XPeng suggests it can more than hold its own.
Delivery growth has been consistent and impressive. The cars are stylish. The technology is leading-edge. And the government is on its side.
XPeng looks set to be a winner in a massive, growing market. That’s precisely the kind of company investors should want to own.
XPEV Stock Gets Cheaper
And, for a while, they did. So what happened?
For the most part, this seems to be a sector-driven problem. EV plays in China and the U.S. have struggled since February. Trading did get overheated, with some highly questionable names creating a rally that was both too broad and too steep.
So on the way up, investors bought basically all of the EV stocks — whether they were quality or not. On the way down, investors are doing the same thing in reverse. Quality names are getting tossed out, and XPEV stock looks like one of those names.
Company-specific news likely hasn’t helped, either. February delivery numbers were seen as soft, which the company attributed to the Lunar New Year holiday.
But March numbers bounced back. XPeng in fact topped its guidance of 12,500 deliveries for the quarter with a total of 13,340.
Investors cheered the March figure. XPEV stock gained 1.2% despite a 16% rally in the two previous trading sessions. The entirety of that rally now has been wiped out.
There may well be more volatility ahead for XPEV and other EV names. Growth stocks, even quality growth stocks, don’t rise in a straight line.
But, over time, they do rise, as long as the story stays intact. For XPeng, the story indeed is intact. The only difference is that the stock price is 50% lower.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.