The Chinese EV industry is still at an early growth stage. This point is underscored by the fact that new EVs accounted for just over 10% of total car sales in Q2 2021. It would therefore be fair to assume that EV companies are yet to see the best part of growth.
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One company that seems like a potential long-term winner is XPeng (XPEV). I am bullish on XPEV stock, with secular industry tailwinds being a catalyst for growth. More importantly, the company has laid a strong foundation, and is positioned to spread its wings in the coming years.
The company’s stock has been subdued for most of 2021. Macro factors like the shortage of chips, and pandemic and regulatory headwinds, have depressed the stock. (See XPEV stock charts on TipRanks)
Investment in Technology
The EV industry already has intense competition. XPeng is positioned to survive and grow, with a technological edge being its differentiator.
Recently, the company announced the launch of its third production model, the XPeng P5. Customer delivery of the sedan will commence in October 2021. From a growth perspective, the new model is likely to ensure that vehicle deliveries remain robust through 2022.
It’s worth noting that for Q2 2021, XPeng reported research and development expenses of $133.7 million. On a year-over-year basis, R&D expenses increased by 170%. This trend is not surprising considering the company’s focus on software technology.
In September, XPeng demonstrated a second prototype of a flying passenger car. More recently, the company introduced its first ridable robot unicorn. Clearly, the company has a big vision for the coming years. This includes entry into robotics and flying cars.
Sustained Vehicle Delivery Growth
For Q2 2021, XPeng reported vehicle deliveries of 17,398. On a year-over-year basis, deliveries increased by 439%. There are various company-specific catalysts that are likely to ensure that healthy growth sustains in the coming years.
First, the recently launched P5 model will boost delivery growth in the coming quarters. Furthermore, the ramp-up in research and development expenses is also for new production models. As of Q2 2021, XPeng reported cash and equivalents of $5.1 billion. Therefore, there is ample financial flexibility to invest in creating a wider product portfolio.
Further, Xpeng has already commenced vehicle delivery in Norway. Recently, the company started exporting its flagship P7 model for the first time. As the company enters more countries in Europe, vehicle deliveries will remain strong.
Company president Brian Gu opined that XPeng is likely to acquire less successful competitors to expand production capacity. Additionally, the company is already building two new factories in China. The plan for production ramp-up provides a clear indication of the potential demand XPeng foresees.
From a financial perspective, XPeng reported vehicle margin of 11% for Q2 2021. In the prior year comparable quarter, vehicle margin was at negative 5.6%. With strong deliveries, key margins are likely to expand further.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, XPEV stock comes in as a Strong Buy, with six Buys assigned in the past three months.
The average XPEV price target is $56 per share, implying 61.5% upside potential from current levels.
Concluding Views
XPeng is positioning itself for a growth inflection point in the global EV industry. At the same time, the company is looking for diversification into robotics and flying cars. These segments can be potential long-term value creators.
For now, vehicle deliveries are likely to remain strong. The key catalysts being demand within China, and international expansion.
With a strong cash buffer and available credit facilities, XPeng has the financial flexibility to pursue aggressive organic, and acquisition-driven, growth.
These factors make XPEV stock attractive. A break-out on the upside seems likely once temporary headwinds wane.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article.
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