XPeng Stock: Anchored in Valuation, Not Speculation (NYSE: XPEV)
XPeng (NYSE: XPEV) has sold just under 150,000 electric cars, but the market already values the company at $15 billion. Investors might wonder: is the company’s market capitalization justified? Can the EV start-up become its current valuation? In this article, I try to answer that question by evaluating Xpeng based on a residual earnings framework. My conclusion implies that there is considerable speculation in XPeng’s valuation. Only assuming terminal value growth greater than 6.5% and WACC less than 9.5% is XPEV’s current stock price justified.
XPeng is an emerging automotive company based in Guangzhou, China. Founded in 2015, the company designs, develops, manufactures and markets electric vehicles. Like many “start-up” automakers such as Tesla (TSLA) and NIO (NIO), XPeng is not just focused on vehicle electrification, but also on smart/data technology, including autonomous driving. and smart connectivity. That said, XPeng’s electric vehicles are positioned to appeal to tech-savvy middle-class consumers in China and abroad, with car prices ranging from around $22,000 to $45,000. In early 2022, XPeng launched four main models: the P7, a mid-size sedan; the P4, an executive sedan; the G3i (SUV) and the G9 (SUV). When it comes to XPeng’s technology, two solutions stand out: First, the company has developed an advanced automatic driving and parking assistant named XPILOT. Second, XPeng cars are equipped with the proprietary Xmart operating system, which is marketed as an intelligent ecosystem including solutions such as AI voice assistant and remote app control. Interestingly, XPeng is also experimenting with flying cars through its subsidiary HT Aero.
XPeng’s mission reads as follows:
Driving the transformation of smart electric vehicles with technology and data, shaping the mobility experience of the future.
XPeng has received equity funding from many international companies, including Foxconn, Alibaba (BABA) (OTCPK: BABAF), Xiaomi (OTCPK: XIACF) (OTCPK: XIACY) and Sequoia Capital China. The major shareholders are He Xiaopeng, which owns 23% of the company’s shares and Alibaba, which owns 12%. XPeng went public on the New York Stock Exchange in 2020, with shares jumping 40% on the first day of trading. As of July 2021, XPeng is also listed on the Hong Kong Stock Exchange.
Although XPeng has sold just under 150,000 electric cars, the Chinese market for electric vehicles is huge. According to the CPCA, China’s electric vehicle market in 2021 was 3.31 million vehicles, or 53% of the global market. While many Chinese tech companies faced regulatory scrutiny in 2021, the EV market is actually heavily backed by the government. This is due to the high air pollution experienced by the country. After the government announced a cap on the annual registration of fossil fuel vehicles, the electric vehicle market has seen huge growth, with startups such as XPeng, NIO and Li Auto (LI) entering the market. Although the market is growing rapidly and the Chinese government is providing a tailwind, investors should keep in mind that the market remains highly competitive. When buying a car, Chinese customers always tend to prefer foreign brands such as Tesla, Volkswagen and BMW. According to the China Passenger Car Association, XPeng’s P7 ranked as the 10th best-selling electric vehicle in China, with the Tesla Model 3 and Model Y ranking 2nd and 3rd respectively. Notably, XPeng also aims to expand into the European market, which is the second-largest EV market after China with 33% global market share. In the fourth quarter of 2021, the company opened the first branded overseas experience store in Stockholm.
XPeng works and develops like a real start-up. In 2021, XPeng delivered a total of 98,155 vehicles, representing a 263% year-on-year increase, and the company’s total revenue increased by 259.1% year-on-year. the other, from $860 million to $3.3 billion. The gross margin has also improved: from 4.6% in 2020 to 12.5% in 2021. However, profitability is still negative. In 2021, XPeng recorded a net loss of $763.1 million, or a loss of $0.93 per XPEV ADS share. The loss is not surprising considering that XPeng spends more than a third of revenue on research, development and marketing. Going forward, XPeng will likely continue to register losses at least until early 2024. However, this is not necessarily bearish. For reference, it took Tesla nearly two decades to achieve operational profitability.
XPeng ended fiscal 2021 with $6.3 billion in cash and cash equivalents and less than $1 billion in total debt. That said, XPeng’s financial position appears healthy and well funded to fund significant R&D spending and growth opportunities.
To assess XPEV, I use the Residual Earnings Framework, which is widely regarded as a reliable assessment tool for writing losses in fast-growing companies such as XPeng. My main assumptions are:
- I base my EPS estimates on analyst consensus through 2026.
- I apply the CAPM model to derive the cost of equity and secondly I calculate the WACC (10.5%) based on the trading leverage.
- As for the terminal growth rate, I think growth equal to the estimated long-term nominal GDP growth is adequate, if not underestimated. However, investors should be careful in paying for high terminal value growth.
My calculation returns a base target price of $9.04/share. Thus, XPEV appears significantly overvalued. Also, my conclusion does not necessarily depend on the above assumptions regarding the WACC and TV-growth combination. In fact, I’ve also attached a sensitivity chart, which shows that almost all WACC and TV growth scenarios involve overvaluation. Only assuming TV growth above 6.5% and WACC below 9.5% is XPEV’s current stock price justified. For reference, red cells imply overvaluation relative to the current market price, and green cells imply undervaluation.
Investors looking to buy shares of XPeng – despite the stock’s valuation premium – should be aware of the following risks: First, XPeng is a loss-making company and there is no guarantee that the company will achieve profitability in 2024, if ever. Second, as the company invests heavily in R&D, there is no guarantee that the company’s innovation efforts – for example, self-driving and flying cars – will ever materialize. Third, XPeng is based in China. Although the CCP currently acts favorably towards EV companies, this may change in the future. Investors should keep in mind that XPeng collects and uses a lot of customer data, something the CCP and the EU seek to regulate more effectively. Finally, the current economic challenges in China such as inflation, real estate crisis and low consumer confidence will certainly add a transitory headwind to XPeng’s short to medium term trading.
XPEV stock looks overvalued. While the stock is currently trading at $22.83/share, my baseline valuation calculates a fair target price of $9.04/share. As I advise investors to anchor on valuation rather than speculation, I conclude my analysis with a sell recommendation.