I am bullish on XPeng (NYSE: XPEV) as it has strong growth potential and large upside to its consensus price target from Wall Street analysts.
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On top of that, its enterprise value-to-revenue multiple is quite low given how much growth potential the company has, and Wall Street analysts are unanimously bullish on the stock. Last, but not least, the Chinese government supports the company, giving it a competitive advantage.
XPeng is a smart EV company based in Guangzhou, China. It integrates AI and driver-assistance technologies into its EVs, and is responsible for designing, developing, manufacturing, and marketing all of its EVs.
More than 3,500 employees are dedicated to the research and development aspect of the business, making XPeng one of the biggest companies in the country — if not the world. In March of 2021, the company announced the launch of its lithium iron phosphate battery-powered vehicles, and in April it signed an agreement to launch a new base in Wuhan, China.
Strengths
XPeng has been steadily expanding its business with innovative creations and efficient marketing of its EVs.
With its new base in Wuhan, the company is expected to boost its production to meet the increasing demand for smart EVs. Since it’s focused toward middle-class consumers in China, its market size is significantly greater than other EV manufacturers.
Forty-three percent of the company’s employees are dedicated to research and development, which is an essential element of the smart EV industry. Additionally, it has also signed a contract with five Chinese banks for credit facilities.
Recent Results
XPEV saw a 616.1% year-over-year increase in the first quarter of Fiscal Year 2021, with revenues reaching RMB2,950.9 million. The company also completed deliveries of more than 13,000 vehicles in that quarter with its gross margin accumulating to 11.2%.
The net loss for the quarter was RMB786.6 million, which is significantly more than the previous year’s first quarter. The net loss for the previous year’s first quarter totaled RMB649.8 million, and in Q4 it reached RMB787.4 million.
The total expected revenue for Q2 2021 is expected to have a year-over-year increase of between 475.5% and 492.4%.
Valuation Metrics
XPEV stock is difficult to value right now given that it is not profitable. That said, it trades at a reasonable 7.1x enterprise value-to-revenue ratio, and is expected to grow revenue by 82.7% in 2022.
As a result, if XPEV can improve profit margins as it scales and generate substantial profitability, shareholders should see enormous returns.
Wall Street’s Take
According to Wall Street analysts, XPEV earns a Strong Buy analyst consensus based on five unanimous Buy rating in the past three months.
The average Xpeng price target of $62.96 puts the upside potential at 24.6%.
Summary and Conclusions
XPeng has massive upside potential given its low enterprise value-to-revenue ratio, and large discount to the consensus price target. Given its strong position in the high-growth and world-leading EV industry, backing from the Chinese government, and unanimous bullish sentiment from Wall Street analysts, the outlook is promising.
On the other hand, investors should keep in mind that the company is far from profitable, and faces stiff competition from deep-pocketed competitors in the Chinese EV space.
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Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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