Chinese electric vehicle (EV) manufacturer Xpeng Inc. (XPEV) is known for its mid-to-high end SUVs. The company is considered  a strong competitor to Tesla, Inc. (TSLA) and is one of the major players in the world’s largest EV market.

Shares of XPEV have gained 55% over the past year and 49.2% in the last six months. The company made history by unveiling the world’s first automotive-grade LIDAR-equipped EV yesterday. LIDAR stands for Light Detection and Ranging. It is a method for determining ranges by targeting an object with a laser and measuring the time for the reflected light to return to the receiver.

However, several concerns around the EV industry’s near-term prospects have led to a 23.2% decline in XPEV’s the stock so far this year. Despite the company’s recent product launch, its low profit margin and negative cash flows make its shares’ recovery prospects uncertain.

Click here to checkout our Electric Vehicle Industry Report for 2021

Here’s what we think could drive XPEV’s performance in the near term:

Industry Headwinds

The EV industry is  witnessing a pullback following a year-long rally. The S&P Kensho Electric Vehicles Index has improved just 6% year-to-date and declined 2.2% month-to-date. This compares to the index’s 236.2% gain over the past year. The primary reason for  this price decline is investors’ rotation this year away from this  generally overvalued industry and into  value stocks.

A global semiconductor shortage is contributing  to the sell-off because it is causing a temporary halt in EV production in some instances and EV companies are  lowering their sales outlook. This headwind is  expected to limit the  growth of EV companies. The semiconductor shortage is expected  to remain a barrier in the industry’s growth trajectory for  some time because increasing the supply of these processors requires highly regulated “semiconductor fab” manufacturing facilities, which take one to two years to  construct.

Low Profitability and Liquidity

XPEV has generated $895.30 million in revenues in the past year. Its trailing-12-month gross profit totaled $40.75 million, translating to a gross profit margin of 4.55%. However, the company’s gross profit margin is 86.3% lower than the industry average  33.27%. With negative operating profits and net income, XPEV’s trailing-12-month return on sales stood at negative 46.75%. Moreover, the company’s ROE, ROA and ROTC margins are negative.

XPEV’s trailing-12-month net operating cash flow came in at negative $135.83 million. Though the company’s debt represents only 5.44% of its  total capital, it does not  have adequate cash flows to bear the interest burden on the debt. The company’s relatively high current and quick ratios of 5.06 and 4.38, respectively, indicate an inefficient allocation of resources.

Stretched Valuation

XPEV’s non-GAAP forward P/E is negative. In terms of forward price/sales, XPEV is currently trading at 12.81x, 847.3% higher than the industry average1.35x. Its forward EV/sales multiple of 10.06 is 495.3% higher than the industry average 1.69.

Also, the stock’s forward price/book ratio of 6.46 is 76.9% higher than the industry average  3.65.

POWR Ratings Reflect Bleak Prospects

XPEV has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

The stock has a D grade for Growth, Value, and Quality. XPEV’s EPS declined 51.2% year-over-year, justifying the Growth grade. Furthermore, the company’s premium valuation and low profitability are in sync with the Value and Quality grades.

Of the 53 stocks in the B-rated Auto & Vehicle Manufacturers industry, XPEV is ranked #45. In addition to the grades we’ve highlighted, one  can check out XPEV Ratings for Sentiment, Stability, and Momentum here.

There are 22 stocks in the Auto & Vehicle Manufacturers industry with an overall rating of A or B. Click here to view them.

Bottom Line

Though XPEV is the first company to launch a LIDAR-enabled EV, the efficacy of the vehicle has not yet been proven . Moreover, given the hot  competition in the Chinese EV market, XPEV’s negative profit margins and cash flows are expected to hold back its  growth. Thus, we think the stock is best avoided now.

Click here to checkout our Electric Vehicle Industry Report for 2021

XPEV shares were trading at $31.01 per share on Thursday afternoon, down $1.88 (-5.72%). Year-to-date, XPEV has declined -27.60%, versus a 11.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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