Robert Way
XPeng (NYSE:XPEV) has reported today its Q2 2022 earnings, which were acceptable, but once again provided weak guidance for the next quarter, showing that external factors continue to impact its business prospects in the short term. However, long-term prospects remain positive, and its valuation remains undemanding, thus XPeng remains a good long-term play in the EV sector.
As I’ve analyzed in previous articles, I’m bullish on XPeng over the long term as the Chinese startup seems to be well positioned to benefit from the secular growth trend of the electric vehicle (‘EV’) market in China, and abroad, which is expected in coming years.
While the past few months have been rough for the auto sector in China, due to COVID 19-related lockdowns that have affected car sales, XPeng was able to deliver more units than it was expecting when it reported Q1 earnings. Indeed, while XPeng’s guidance was for 31,000-34,000 vehicle deliveries in Q2, but it was able to deliver 34,422 units, representing an increase of 98% YoY. During the quarter, XPeng reached accumulated deliveries above 200,000, a great milestone for the company.
Taking into account this backdrop, XPeng reported today a relatively good set of results, considering the challenges the company had to face during the last quarter, namely factory shutdowns and the ongoing supply chain issues affecting the auto industry.
XPeng Q2 2022 Earnings Analysis
XPeng has released today its earnings related to Q2 2022 financial results, beating estimates at the top line, but missing on earnings. Its revenues amounted to $1.11 billion in the quarter, being slightly ahead of estimates, while its EPS loss of $0.43 was 32% worse than expected.
During the second quarter of 2022, XPeng delivered more than 34,000 units, almost doubling the number of deliveries compared to the same quarter of 2021. This strong growth was boosted by the launch of the P5 during 2021, reaching close to 13k units delivered in Q2, while the P7 reported an increase of 39% YoY to more than 15,000 deliveries in the quarter.
XPeng continues to expand its model line-up, having presented a few months ago a new flagship SUV (the G9), that is expected to be officially launched next September. Given that the SUV market is quite popular in China, this model should certainly be important for further unit growth in coming quarters, thus XPeng’s strong unit and revenue growth is expected to remain strong in the near future.
Nevertheless, XPeng has provided somewhat downbeat guidance for Q3, expecting to reach deliveries of some 29,000-31,000, way below the consensus expectations of close to 45,000 units. It expects revenue in Q3 to be between $1.02 billion and $1.08 billion, representing a small decline compared to the previous quarter.
Due to higher raw material and battery costs, vehicle margin decreased again during the last quarter, reaching 9.1%, being the lowest level in the past few quarters (10.4% in the previous quarter and 11% in Q2 2021). This shows that XPeng has struggled to some extent to pass higher costs to its customers despite raising prices in recent months, while it has been able to offset some weakness in vehicle margin from gains in its service business, leading to an overall gross margin of 10.9% in Q2.
This negative margin trend is not ideal for the company to achieve break-even in the coming years, but is mainly related to outside factors, while XPeng needs to continue to do work on improving operating leverage both by increased production efficiency and cost synergies achieved by having a higher scale, namely in its sales and charging station network.
In Q2 2022, its net loss was $403 million, a higher amount than compared to Q1 2021, as the company continues to invest in its business growth through R&D, expansion of its sales network and associated staff, plus higher marketing costs. Indeed, in the last quarter, XPeng continued to expand its physical sales network in China and had now 388 stores in 142 cities at the end of June, which is a critical factor for future sales growth.
Despite these organic initiatives, external factors are also hurting the company, namely Shanghai’s lockdowns during the quarter and supply chain issues, penalizing the company with production losses and chip shortages. This situation is not expected to change dramatically in the short term, especially the supply chain issues, explaining its conservative guidance for the coming quarter.
Nevertheless, sales growth should be supported by upcoming models in the next few months, given that in addition to the G9, XPeng is expected to launch two new models during 2023, enhancing its product offering in the mid-market segment.
The G9 is expected to start mass deliveries in the fourth quarter of 2022, being a luxury SUV competing directly with NIO Inc. (NIO) or Tesla’s (TSLA) Model Y, being therefore an important model for XPeng to increase unit sales in the coming quarters by entering a new segment of the automotive market. Note that XPeng only offers one SUV model right now (the G3), which was the first model of its lineup and is a smaller SUV not targeted for the luxury segment, thus there is a lot of potential for market share gains with the G9, given that XPeng was not represented in this important market segment and was not able to compete directly with its closest peers.
Moreover, XPeng plans to launch two new models during the next year, one based on its B-class platform and another based on the C-class platform, thus targeted for mass-market segments. To distinguish itself from competitors, XPeng plans to offer several industry-leading technological capabilities with these two new models, plus an attractive design to attract a younger customer base.
This means that despite current headwinds for unit sales growth, XPeng’s medium-term prospects are quite solid from a product portfolio perspective and growth should remain quite good over the medium term.
Regarding its financial position, XPeng had cash of about $6.2 billion at the end of June, which is enough to finance its growth over the next few years, and therefore, the current risk of shareholder dilution seems to be low.
Valuation & Estimates
XPeng’s share price has been on a downtrend over the past few months, a similar path to many growth companies and other EV startups. Despite that, XPeng’s growth prospects remain quite good, and recent weakness is mainly related to lower valuations for growth stocks rather than some fundamental issue with the company. Indeed, XPeng’s valuation has de-rated considerably in recent months, from a peak valuation of close to 10x forward revenues during its peak back in June/July 2021, to only 2.3x forward revenues nowadays.
Considering that despite the challenges facing the auto industry, XPeng has been able to grow its revenues at close to 100% in the last quarter, and growth prospects are good in the near term, this valuation seems to be quite undemanding. This strong valuation de-rating clearly shows that investor sentiment has changed dramatically for non-profitable companies in the past few months, rather than being a sign of some fundamental issue.
Indeed, revenue estimates continue to show a strong path in the coming years, considering that according to analysts’ estimates, XPeng’s revenue is expected to almost double in 2022 to more than $5.9 billion while, for 2023, revenue is expected to increase to $10 billion, and be close to $22 billion by 2025. This means that, assuming the same 2.2x forward sales multiple, XPeng’s fair value would be about $59 per share by end-2024, which is way above its current share price.
This means that there is a lot of upside potential for long-term investors that look beyond short-term headwinds in the auto industry, while a higher valuation is likely when economic conditions improve and supply chain issues are potentially fixed, something that may happen over the next couple of years.
Moreover, taking into account XPeng’s historical valuation multiple of close to 6x forward revenues over the past year, and assuming a discount to account for the ‘bubble’ period for EV growth stocks during 2021, assuming a multiple of 4x revenues by end-2024 this would represent a fair value for XPeng’s stock above $100 per share. Therefore, the return-risk proposition of XPeng’s stock seems to be quite compelling right now for long-term investors, with plenty of upside potential over the next two to three years if management executes well of its growth ambitions in the medium term.
Conclusion
XPeng’s long-term prospects remain quite good, but the company continues to be plagued in the short term by external factors that are hurting its growth. Nevertheless, XPeng remains a compelling investment for long-term investors, as XPeng’s weak share price over recent months has created a mispricing and upside potential over the next two to three years could be quite large.
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