The Dip in Xpeng Is a Chance to Buy a Multi-Bagger

Xpeng (NYSE:XPEV) stock shot up after the Chinese electric-vehicle maker entered the European auto market with an initial batch of 100 G3 SUV deliveries to Norway.

Xpeng logo and P7 model in store XPEV stock

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Xpeng logo and P7 model in store XPEV stock

It marks the first time that Chinese-made smart EVs will be directly delivered to individual customers in Europe, laying down a major challenge for Elon Musk’s Tesla (NASDAQ:TSLA), which so far had to contend with Volkswagen (OTCMKTS:VLKAF) on the continent for European BEV bragging rights.

Then why is XPEV stock down 12.8% in the space of a month? It has to do with several things, some under the company’s control and some not.

President Donald Trump signed a bill calling for foreign companies’ delisting that doesn’t adhere to the same accounting transparency standards that securities regulators impose on public U.S. firms. The bill drew rare bipartisan support in Congress before Trump signed it into law.

Separately, the electric vehicle maker has chosen to make hay while the sun shines. Xpeng raised $2.16 billion from selling 48 million American depositary shares at $45 apiece, cashing in on the rally in electric car shares. Markets didn’t react favorably to the move, and understandably so.

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Finally, there is the issue of valuation. Although shares have lost steam, they are still trading at 60x price-sales. At this point, investors have become used to such high multiples in the space. But the gap between the price target and fundamental-value estimate is cause for concern.

Despite all this, XPEV stock remains a good investment. Margins and deliveries continue to improve at a healthy clip, it’s working on innovative autonomous driving concepts, and management is rock solid. I advocate adding shares of the Chinese EV manufacturer each time there is a dip in stock price.

XPEV Stock Is Positioned Well

It can become confusing navigating the EV space right now. There are so many options to choose from that it can get a bit dizzying. Several EV companies are entering the market with each passing day, hoping to be the next Tesla. The most notable has to be three Chinese EV companies – Nio (NYSE:NIO), XPeng, and Li Auto (NASDAQ:LI).

Of them, NIO is the most prominent player. Backed by Tencent (OTCMKTS:TCEHY), JD.com (OTCMKTS:JDCMF), and Baidu (NASDAQ:BIDU), the Shanghai-based manufacturer, is having a great year, much like its more famous American counterpart. It delivered 5,291 vehicles in November, representing 109.3% year-over-year growth and a new monthly record. In the year thus far, NIO delivered 36,721 vehicles, a rise of 111.1% year-over-year.

Gallery: 4 EV Stocks That Could Be the Next Tesla (InvestorPlace)

Through the years, Tesla (NASDAQ:TSLA) has proved sceptics wrong; Be it on the front of business development or shareholder value creation. And overall, Tesla’s growth has been driven by innovation and supported by industry tailwinds. That said, the entire electric vehicle (EV) industry is poised for a multi-decade growth. And there are several names among EV stocks that can be the next Tesla. That said, global EV sales — as a percentage of total vehicle sales — was just 2.5% in fiscal year 2019. China is also targeting to increase new energy vehicle sales to 50% of total car sales by FY2035. In turn, I will not be surprised if the United States and Europe adopt a similar target. And this underscores my view on a multi-decade industry growth. So, given the growth potential, I believe that electric vehicle stocks should find their way into your core portfolio. I would look at pure-play EV companies than traditional car manufacturers that are diversifying into production of EV. With that in mind, let’s discuss four interesting names among EV stocks that can be value creators in the coming years: Li Auto (NASDAQ:LI) Nio Limited (NYSE:NIO) Workhorse Group (NASDAQ:WKHS) Frisker (NYSE:FSR) Now, let’s dive in and take a closer look at each one.

EV Stocks That Could Be the Next Tesla: Li Auto (LI)

Li Auto is among my favorite names if we look at emerging EV stocks. LI stock was listed in July 2020 at $16.40. And recently, the stock surged to a high of $47. However, it’s been downhill since then. And with Li Auto announcing a follow-on share offering of 47 million shares, the stock has declined to $30. Collectively, though, I believe that the current correction is a good opportunity to accumulate LI stock. In terms of business growth, Li Auto has reported strong quarterly vehicle deliveries. For the third quarter of 2020, the company reported 8,660 vehicle deliveries, which was higher by 31% on a quarter-over-quarter basis. Furthermore, for Q4 2020, the company expects 11,000 to 12,000 vehicle deliveries. Another important point to note is that the company generated $110.4 million in free cash flow (FCF) for Q3 2020. This implies an annualized FCF of $450 million. Since the company is in an early growth stage, the follow-on public offering provides liquidity buffer. However, as FCF swells, I don’t see another dilution coming. Additionally in Q3 2020, the company also partnered with Nvidia Corporation (NASDAQ:NVDA) for the launch of premium smart SUVs in FY2022. Li Auto is also increasing research and development expenses towards autonomous driving. Therefore, the pipeline is attractive and growth is likely to sustain.

Nio (NIO)

Nio stock has already been an out-performer, having surged by 1000% for year-to-date FY2020. After a recent high of almost $56, the stock has witnessed profit booking all the way down to $43. However, I believe that gradual accumulation can be considered in the next few months. As China’s economy recovers from the impact of the pandemic, the company’s vehicle deliveries have surged. In fact, for November 2020, the company delivered 5,291 vehicles — 109.3% higher YOY. Additionally, the company’s Q3 2020 results were encouraging. Vehicle margin continued to expand, and Nio reported positive operating cash flow for the second-consecutive quarter. Another important point to note is that the company can potentially launch two new sedan models in the coming year. This is likely to ensure that vehicle delivery growth remains strong. In addition, Nio has plans for expansion in Europe in the second half of FY2021. And given the plans for the coming year, the correction is indeed a good opportunity to accumulate Nio stock. Moreover, as said before, China has set an ambitious target for new electric vehicle adoption in the country. By FY2025, China expects new energy vehicle sales to be 20% of total car sales. By FY2035, this is expected to increase to 50%. In turn, this is the reason to focus on LI stock and Nio stock. Both companies will continue to grow in the next decade, and I will not be surprised if Nio is the Tesla equivalent in China in the next few years.

EV Stocks That Could Be the Next Tesla: Workhorse Group (WKHS)

WKHS stock is another name among EV stocks that’s worth keeping in the radar. For the current year, the stock has climbed by 590%. Workhorse is involved in the designing and manufacturing of last-mile electric delivery vehicles. The company has an early-mover advantage in the commercial EV industry, and that makes WKHS stock attractive. It’s expected that the commercial EV market will grow at a CAGR of 39.9% through FY2022. For the United States, the company expects the annual market for last-mile deliver vehicles to be $18 billion. Moreover, in terms of a trigger for stock upside, the company is expecting an order from U.S. Postal Service. The order is likely to be in excess of $6 billion. However, the USPS has been delaying the fleet replacement contract. Therefore, I would keep WKHS stock in the radar instead of buying at current levels. Once there is confirmation on the contract, the stock can surge. Workhorse also has technology validation from FedEx (NYSE:FDX) and United Parcel Service (NYSE:UPS), among others. Therefore, there can be further orders in the pipeline. Still, it makes sense to take a big plunge in WKHS stock once a big order is confirmed. That would provide clear revenue and cash flow visibility.

Fisker (FSR)

FSR stock, which was listed through reverse merger, is another interesting name in among electric vehicle stocks. Fisker is aiming to be the world’s first digital car company. Collectively, the company aims to capture the affordable SUV market. The company’s first model, Fisker Ocean, is anticipated to be launched in Q4 2022 with a starting price tag of $37,499. Nonetheless, the vehicle delivery is still two years away. However, Fisker claims to have received soft orders for 25,000 vehicles. The company has also received hard orders for more than 5,500 vehicles. Therefore, the initial response has been encouraging. And if the order backlog continues to grow in the next two years, FSR stock will trend higher. Fisker has set an ambitious target to achieving $13.2 billion in revenue by FY2025. For the same year, the company expects free cash flow of $1.9 billion. It’s too early to believe that these targets could be achieved. However, a small exposure to the stock makes sense at current levels. On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.

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5/5 SLIDES

XPeng is not far behind. It delivered 4,224 vehicles in November, a 342% increase year-over-year. Total deliveries amount to 21,341 vehicles year-to-date 2020, an 87% jump year-over-year.

It reported bullish sales guidance and improved gross profit margins, though it lost $169.2 million for the quarter, slightly more than in the second quarter. The higher loss is attributable to higher spending on R&D for autonomous driving and other innovations.

Overall, the earnings report was a positive one. However, short sellers continue to bet against the stock. Meanwhile, Xpeng, which went public in the U.S. in August at $15 a share and has reached $45, continues to be overvalued.

Short-Term Headwinds and Fundamental Long-Term Change

Despite the positive earnings report and strong sales numbers, several investors have legitimate concerns surrounding Xpeng. At the moment, the biggest concern has to be the new legislation that could remove Chinese companies from U.S. exchanges if American regulators are not allowed to review their financial audits.

The Holding Foreign Companies Accountable Act will expect corporations to establish that they are not owned or controlled by a foreign government and allow the U.S. Public Accounting Oversight Board to review their financial audits. This sets the stage for delisting Chinese companies on U.S. exchanges, including XPeng, and Li Auto. Nio believes it complies with the new requirements.

The bill should be seen against the backdrop of the broader China-U.S. trade war and the accounting scandal that put Luckin Coffee (OTCMKTS:LKNCY) out of commission.

Plus, there are larger, more systemic issues that should concern investors. Chinese state subsidies are falling and could expire, just as competition ramps up in the world’s biggest EV market.

You also have to factor in that the novel coronavirus pandemic, which battered consumer cyclical stocks, will eventually recede to the background. Vaccines are rolling out, and soon you will see businesses finally start to whir again. Naturally, these companies will start to get some more love looking forward.

Buy the Dip

I understand the skepticism surrounding XPEV stock. The company is operating in the mid-end market segment. Xpeng will have to keep innovating to provide the consumer with more options and compete with its rivals’ catalog. The subsidies provided by the local Chinese states are falling and could expire. And as a Chinese firm, Xpeng will remain subject to the frothy relations between Beijing and Washington.

However, if you look at the fundamentals and the story backing Xpeng, then you will understand why I am bullish on this one. Xpeng’s CEO and founder, Xiaopeng He, has selected a management crew comprising eminent professionals from ZTE (OTCMKTKS:ZTCOY), TEsla, JPMorgan (NYSE:JPM), and Volkswagen. Large conglomerates are backing it with deep pockets.

Valuation is undoubtedly an issue. Shares are still trading at a discount to the larger players, Tesla and Nio. Plus, even if relations with the U.S. sour, Xpeng has a robust domestic market that it will continue to tap.

President Xi Jinping is hoping China will achieve carbon neutrality by 2060. The shift to “new-energy” vehicles – electric, plug-in hybrid, or fuel cell-powered – is part of this strategy. This is a secular tailwind in China that is not going anywhere.

That’s why I will advocate adding XPEV stock to your portfolio whenever it loses steam. Buy the dip whenever the opportunity presents itself.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tags: buy Chance dip MultiBagger Xpeng