After a sharp rally to a 52-week high of $72.20, XPeng (XPEV) stock has been in a zone of consolidation. On Feb. 9, the stock closed at $48.75, and thus, a break-out to the upside could be imminent. Let’s discuss the bullish thesis for the stock, with an initial investment horizon of 12-24 months.
As an overview, concerns related to climate change has the potential to trigger sustained growth for several sectors. The electric vehicle space is positioned for multi-decade growth, with China likely to remain the biggest market. With an operating base in China, Xpeng is well positioned to benefit from industry tailwinds.
Bloomberg estimates that 1.7 million EVs were sold in FY2020, with EV sales likely to increase to 8.5 million units in FY2025 and to 54 million units by FY2040.
If this estimate is realistic, it’s just the beginning of the growth story for EV companies. Of course, investors need to be selective. To this end, XPeng is among the quality players that will survive and grow.
XPeng is on a High Growth Trajectory
XPeng has continued to report strong vehicle deliveries. This is likely to translate to sustained top-line growth and margin improvement.
For the fourth quarter of 2020, the company reported the delivery of 12,964 vehicles, which reflects a 303% gain on a year-on-year basis. Even for January 2021, vehicle deliveries increased by 470% year-on-year. Going forward, vehicle deliveries should remain strong due to two reasons.
First and foremost, as China’s economy crawls back to normalcy, EV sales for FY2021 are likely to be 40% higher compared to the last year, according to S&P Global. Further, China’s EV sales are expected to reach 6 million units by FY2025, from 1.8 million units in the current year. This presents a big growth opportunity for XPeng even amidst strong competition. As the company’s physical sales and service network expands, this should drive sustained growth in vehicle deliveries.
Second, XPeng’s growth is not limited to China. In December 2020, the company delivered G3 Smart Electric SUVs to customers in Norway. This is just the beginning of the company’s expansion into the European markets. It’s worth noting that nine of the top ten markets for electric vehicle penetration are in Europe. Clearly, the opportunity is big and XPeng is making the right moves.
Financial Flexibility to Push for Aggressive Growth
In the last quarter of 2019, Nio Inc (NIO) had plunged to a low of $1.32. A key reason was cash burn and the struggle to finance growth. Once the company managed to boost its cash position, the stock skyrocketed. Therefore, it’s important to discuss the financial headroom for growth companies.
XPeng is well positioned on that front. For Q3 2020, the company reported $2.9 billion in cash and equivalents. In Q4 2020, the company also raised gross proceeds of $2.2 billion in a follow-on offering. Recently, the company entered into an agreement with banks for RMB12.8 billion in credit facilities. With these rounds of funding, the company looks well financed for the next 24 months.
The company’s vehicle level margin also turned positive in Q3 2020. Considering the growth in vehicle deliveries, XPeng should be able to deliver operating level profit in the next few quarters. This is another potential upside trigger for shares.
It should be noted that the company has already initiated the construction of a smart EV manufacturing base. It’s likely to commence production in December 2022. What’s more, the company already has an annual production capacity of 100,000 units. With the new manufacturing facility, the company will be positioned to cater to incremental demand. EBITDA margin will also improve on economies of scale.
Wall Street’s Take
Turning to analysts on the Street, XPEV has received 5 Buys, 2 Holds, and 1 Sell in the last three months. So, the stock gets a Moderate Buy consensus rating. At $53.93, the average analyst price target suggests 11% upside potential. (See XPeng stock analysis on TipRanks)
XPeng is well positioned for sustained growth in the coming years. The company is investing in new manufacturing, technology as well as placed a significant focus on increasing its sales footprint. This is likely to deliver results in the form of strong top-line growth and margin expansion.
The stock has been in a consolidation range and it would not be surprising if XPEV doubles from current levels in the next 12-24 months.
Disclosure: No position.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.