XPeng (NYSE: XPEV) investors have had a rough outing in recent months. The Chinese electric vehicle giant is facing many headwinds. It’s been difficult for the whole sector, but XPeng has been hit particularly hard. Its October deliveries report reflects its growing woes and the worrying state of the Chinese economy. Despite its relatively compelling long-term case, it’s tough to wager on XPEV stock, given its current challenges and bleak outlook. Hence, we are bearish on XPEV stock at this time.
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XPEV stock has taken a beating over the past 12 months in line with the stock market. It posted its second-quarter earnings results a few months ago, where it missed analyst expectations by a considerable margin and issued guidance for lower-than-expected deliveries in the third quarter. However, the challenging macroeconomic conditions and the coronavirus-led production stoppages in China have severely impacted its results.
Moreover, we saw how its gross and vehicle margins dipped during the quarter. Gross margins were down 1%, while vehicle margins dropped by 1.9% from the prior-year period. The firm attributed the lower margins to its rising operational costs, particularly battery and raw material costs.
Consequently, XPEV stock is trading at multi-year lows and appears more attractive than ever. It’s trading at roughly 1.3x forward sales estimates, more than 50% lower than the estimates from last year. However, its troubling outlook and near-term challenges point to more carnage for the stock.
Interestingly, XPEV stock even has a 3 out of 10 Smart Score, indicating that the stock is likely to underperform the market, going forward.
Zero-COVID Policy is Crippling the Chinese Economy
In the second quarter of 2022, disruptions caused by COVID-19 and industry-wide supply chain constraints were a key theme for the Chinese EV sector. However, the situation improved remarkably after China lifted lockdown orders in Shanghai in June. In the months since, production has continued to ramp up rapidly, and most companies in the sphere were able to mount a comeback.
However, XPeng’s deliveries in the past couple of months have trailed its performances from the same period last year. In line with the country’s zero-COVID policy, its top manufacturing cities in Hefei and Xi’an had to shut down multiple areas, which significantly impacted EV production. The disruptions led to a massive drop in deliveries for all EV companies operating in China.
Investors appear to be losing faith in China’s ability to navigate an increasingly complex economic landscape. A supportive policy package from the central government failed to shore up confidence in the country’s property and EV markets, and renewed concerns over the government’s commitment to zero-COVID have added to investor anxiety. The sell-off has also been driven by fears of a macroeconomic crisis in China that could stall demand for electric vehicles (EVs) in the world’s largest EV market.
Though the consensus points to a more conducive environment ahead, it will take considerable time before markets return to winning ways. Supply-chain bottlenecks will continue to be a lingering factor, which will continue to weigh down production and deliveries for EV companies. Supply and demand levels might not find a balance until mid-to-late 2023 or 2024. In the meantime, EV stocks and other Chinese equities will likely face incredible volatility.
Is XPEV Stock a Good Buy, According to Analysts?
Turning to Wall Street, XPEV stock maintains a Moderate Buy consensus rating. Out of nine analyst ratings, six Buys, two Holds, and one Sell rating were assigned over the past three months. The average XPEV price target is $24.65, implying 173.9% upside potential. Analyst price targets range from a low of $3.18 per share to a high of $41 per share.
Takeaway: Steer Clear of XPEV Stock
The recent sell-off across global markets has been especially brutal for Chinese stocks. While this could imply a compelling entry opportunity, several factors point to further volatility over the coming months. Regulatory and geopolitical risks are looming large, while the global economic growth outlook is rapidly deteriorating. As such, investors should tread carefully regarding Chinese EV stocks.
XPeng is in a tough spot right now, and the company is not doing enough to address internal issues. Investors are worried about demand risks, cost and operating inefficiencies, supply-chain constraints, and a lack of clarity on forward strategies. Though it has its growth catalysts, such as the G9 SUV, it’s likely best to steer clear of XPEV at this time.
