Robert Way
XPeng (NYSE:XPEV) posted a mixed earnings sheet for its third quarter on Nov. 15, 2023, but guided for significant delivery and top-line growth in the final quarter of the year. While XPeng saw a significant increase in third quarter shipments due to the return of consumer demand, the Chinese electric vehicle was unable to translate the increased sales into stronger profits. As competition in the electric vehicle market increased, XPeng’s margins also came under pressure. Since Li Auto (flax) is vastly outperforming XPeng in terms of vehicle supply growth and margins, I believe XPeng is not the most attractive, nor the cheapest, Chinese EV start-up that investors should buy right now!
Previous assessment
In August, I reviewed XPeng a STAY after EV company bought DiDi Global (OTCPK: DIDIY)’s smart tool unit and said it would use the acquired technology to start a new brand of electric vehicles next year. I believe the margin trend, while slightly improved in Q3, is still not attractive… especially in light of the much better options in the Chinese EV startup market.
XPeng’s third-quarter earnings beat expectations
XPeng beat earnings and revenue expectations for the third quarter: Adjusted EPS came in at $(0.45) which was $0.01 per share better than the average forecast. Top-line growth was marginal with XPeng beating the consensus estimate by $0.5 million.
Source: Seeking Alpha
Strong supply growth fails to translate into earnings growth
XPeng delivered 40,008 electric vehicles in the third quarter, showing 35% year-over-year growth. In October, XPeng delivered 20,002 electric vehicles which was a new monthly shipment record for the EV maker. However, EV rival Li Auto is crushing XPeng in terms of offering growth: it delivered more than twice the same number of vehicles, 40,422, in October and Li Auto’s third-quarter delivery volume reached 105,108 EVs, representing 296% year-over-year growth.
Li Auto, due to stronger delivery growth, higher monthly production volume and much better margin image remains mine The leading bet in the Chinese electric vehicle market. Another company that is crushing it now in terms of shipments and which is decided to pass Tesla (TSLA) in global shipment volume, is BYD Company (OTCPK: I WILL).
XPeng generated total revenue of 8.53 billion Chinese yuan ($1.17 billion) in 3Q23, showing 25% year-over-year growth. Despite higher revenue, XPeng’s losses widened to 3.89 billion Chinese yuan ($0.53 billion) compared with 2.38 billion Chinese yuan ($0.33 billion) in the year-ago period. Although XPeng generated higher shipments and revenue compared to last year, the EV pricing environment remained weak… and this has been reflected in XPeng’s margins.
XPeng’s auto margins for 3Q23 improved over the quarter from (8.6)% to (6.1)%, but margins remained deeply negative, which stands in stark contrast to Li Auto which reported a margin of vehicles for the third quarter of 21.2%. Li Auto grew its margins by 0.2 PP during the quarter while XPeng improved its auto margins by 2.5 PP Q/Q, but the fact that margins remained negative is why I can’t see a realistic case for a valuation upgrade for XPeng stock for the moment .
Source: XPeng
Outlook for Q4’23
XPeng delivered a strong Q4 23 forecast, which was perhaps the best takeaway from its Q3 earnings release. The EV maker expects to deliver between 59,500 and 63,500 electric vehicles in 4Q23, which at the high end would mean a 186% year-over-year increase (and 168% at the low end). In terms of revenue, XPeng guided for B12.7-13.6B Chinese yuan, implying a year-over-year top line growth of 147.1-164.6%.
XPeng rating, downward trend and related rating
XPeng remains the highest-valued Chinese electric car startup in the industry group, despite an unfavorable margin outlook. Li Auto, NIO, and XPeng are expected to grow their top lines by 57%, 55%, and 75% next year, but as I’ve shown in my work on Li Auto, XPeng’s valuations have fallen consistently (as have NIO’s )… Valuations for Li Auto have risen steadily over the past year.
Based on revenue expectations, XPeng is currently the EV manufacturer in the industry group with the highest revenue multiplier factor of 2.1X. Considering that Li Auto is growing shipments much faster, I believe that Li Auto should also be the company with the highest EV value…however, Li Auto is selling at only 1.6X and is therefore the deal much better for EV for investors, in my opinion. .
NIO is also seeing a return to supply growth and the company launched new EV products in 2023, which is why I see a configuration improvement for NIO at the moment. NIO also currently offers the lowest price-to-earnings ratio of 1.1X, which translates into an attractive risk profile. I currently have strong buy ratings on Li Auto and NIO, and a hold rating on XPeng.
Dangers with XPeng
XPeng is seeing strong delivery growth, but Li Auto is still well ahead of its EV rival in terms of total delivery volume. Li Auto’s margin picture also looks much better than XPeng’s. With negative auto margins still prevalent in the third quarter, I believe XPeng faces a potentially long road to profitability, while Li Auto is already expected to return its first full profit this year. XPeng is expected to generate its first full profit in FY 2027… and that’s if the margin situation doesn’t deteriorate. A delayed earnings timeline and continued negative vehicle margins could threaten my ongoing retention rating.
Final thoughts
XPeng grew its revenue by 25% year-over-year in the third quarter, which was a solid achievement, but the EV company continued to report negative vehicle margins and widening losses compared to last year’s third quarter. While vehicle margins improved by 2.5 PPQ Q/Q, the EV pricing environment is still challenging and the margin situation is unlikely to improve materially in the near term. Considering that XPeng shares are expensive compared to Li Auto and NIO, I believe the risk profile is not tilted to the upside for the EV maker right now. If I had to choose between Li Auto or XPeng, I’d go for Li Auto because of its stronger delivery growth, a quick run to profitability this year, and positive vehicle margins!
