I can see why contrarian investors may be interested in XPeng (NYSE:XPEV) stock. Shares in China-based electric vehicle (or EV) companies have fallen out of favor among investors, but the shift in sentiment has been the most dramatic among this particular name.
As a result of its extended price decline since June, Xpeng has become seemingly undervalued, if you compare its valuation (on a price/sales, or P/S, basis) to that of comparable names.
But while it’s true XPeng trades at a discount to its peers, that doesn’t make it a bargain. There’s a reason why XPEV trades at a lower sales multiple. This company is facing even more challenges than the other high-profile China-based EV makers with U.S. stock market listings.
It’s not an opportune move to try and call a bottom in this stock, as it’s likely to become “cheaper” from here. Here’s why.
XPEV Stock and its Discounted Valuation
XPeng stock currently has a P/S ratio of around 1.9. Li Auto (NASDAQ:LI) and Nio (NYSE:NIO), the other two China EV stocks popular with U.S. investors, each have P/S ratios around 3.5.
Given that analyst forecasts call for this company to experience a similarly-high level of sales growth next year, this may at glance create the assumption that XPEV stock is mispriced. However, take a closer look at the details, and that’s clearly not the case.
XPeng isn’t the only Chinese EV maker facing challenges. China’s economic slowdown has only started to affect EV demand, but the situation could intensify in the coming months. As Barron’s reported on Oct 1., the latest delivery figures for Li Auto and Nio may signal that both names are struggling to take their sales to the next level.
But while Li and Nio may be facing growth challenges, XPeng’s deliveries are in decline. As I discussed on Sep. 30, from June through August, XPeng’s monthly vehicle delivery numbers dropped from 15,295 to 9,578.
For September, deliveries fell yet again, to just 8,468 vehicles. Declining sales, plus worsening fundamentals, justify XPEV’s discounted (and declining) valuation.
Why XPeng Could Keep Dropping
It’s not only falling delivery numbers that make XPEV stock a less appealing opportunity than its peers. This company is also facing the issue of widening losses.
Over the past year, XPeng’s quarterly net losses more than doubled, from $185 million to $403.1 million, or from 23 cents to 47 cents per share. Sell-side estimates call for GAAP losses to come in at a similar amount this quarter (48 cents).
If the company fails to make progress in getting out of the red, shares will continue to trend lower. There’s a good chance of this happening for two reasons.
First, it’s debatable whether the launch of XPeng’s latest model, the G9 Flagship SUV, will help to reverse the aforementioned deliveries/sales decline.
So far, sales of newer models have failed to counter declining sales among older models. This could continue to be the case, especially given decreasingly-favorable conditions in the Chinese EV market. It’ll be difficult for Xpeng to narrow losses if sales keep dropping.
Second, despite the challenges in its home market, XPeng is moving ahead with plans to expand into Europe. This will likely create initial losses, piled atop continued losses for the company’s existing operations.
Bottom Line on XPEV Stock
Based on the most recently reported financial and delivery figures for XPeng, there’s little to indicate that this EV maker is on the verge of turning a corner. In fact, there’s a lot more out there pointing toward continued deterioration of its fundamentals. This in turn will drive a further move lower for shares.
That’s not to say this stock is heading to zero. XPeng currently has sufficient cash and short-term investments on hand (totaling $4.82 billion) to sustain itself for the next few years.
However, after falling nearly 75% over the past twelve months, depending on the severity of China’s in-progress economic downturn, another 75% drop may be in the cards.
XPEV stock has already hurt plenty of bottom-fishers, who’ve attempted to catch this “falling knife” since the summer. As it stands to continue being a “falling knife” situation, don’t become XPEV’s next victim. Instead, avoid this stock.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.