After a stellar run in 2020, electric vehicle stocks have trailed the broader markets year-to-date. But the recent pullback in stock prices of EV companies also provides investors an opportunity to buy a growth stock at a lower multiple. The EV market is rapidly expanding as the shift towards clean energy solutions gains pace all around the world, making stocks such as XPeng (NYSE: XPEV) top bets right now.
XPeng is a China-based EV manufacturer that offers SUVs under the G3 brand and a four-door sports sedan under the P7 brand. Supported by government subsidies and the benefits arising from economies of scale, XPeng is an EV stock I’m buying today.
A look at XPeng’s financials
Valued at a market cap of $33.3 billion, XPeng stock has returned 76% to investors since it listed on the NYSE in August 2020. Despite its market-beating gains though, XPeng is also down 48% from all-time highs.
In the second quarter of 2021, XPeng’s vehicle deliveries rose 439% year-over-year to 17,398 units. Its revenue growth stood at 536.7% compared to the year-ago period as the company reported sales of RMB3,761.3 million, or $583.2 million. Further, gross margin improved to 11.9% in Q2, compared to 11.2% in Q1 of 2021 and a negative margin of 2.7% in the year-ago period.
What I like about XPeng?
In July 2021, XPeng disclosed that it had produced 100,000 cars, which means it took six years to reach the milestone. It was faster than peers NIO and Tesla that took seven years and 12 years to reach the milestone respectively.
Tesla is the largest player in the EV market and has pioneered the industry. Accordingly, it deployed billions of dollars in research and development in order to benefit from a first-mover advantage. This allowed XPeng and peers to build on Tesla’s expertise and business model as a lot of ground was already uncovered.
Tesla bulls might argue that the company’s portfolio of EV cars is far superior in terms of technology and performance. Alternatively, China is considered the world’s manufacturing capital, where companies can quickly access cheap labor and a large workforce pool to scale production over time.
XPeng’s production numbers and vehicle deliveries continue to accelerate as it shipped 25,666 units in Q3, indicating year-over-year growth of 199%. Analysts tracking XPeng expect the company to increase sales by 214% to $2.85 billion in 2021 and by 77% to $5.05 billion in 2022.
Risks to XPeng’s share price
XPeng continues to report an adjusted loss. It’s part of a capital-intensive industry which suggests it will have to raise equity capital in case the losses persist, despite its cash balance of almost $5 billion at the end of Q2. A dilution in shareholder wealth is likely to impact the stock negatively.
Further, the Chinese government’s crackdown on tech companies will also impact XPeng stock given the lack of transparency associated with the country.
XPeng’s growth potential
XPeng is part of the largest EV market in the world. It is poised to benefit from multiple secular tailwinds that include a rise in the purchasing power of China’s middle class, making XPeng a stock you can add to your growth portfolio.
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Contributing Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.