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Wait For a Pullback Before Jumping Into Xpeng Stock

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·5 min read
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Electric vehicle (EV) stocks remain hot. But, so far this month, none have held a candle to China-based Xpeng (NYSE:XPEV) stock. Shares have more than doubled since Nov 1. As a result, shares now trade at a sky-high valuation.

XPEV stock
XPEV stock

Source: Johnnie Rik / Shutterstock.com

Based on trailing twelve month revenues, shares currently sell for a price/sales (P/S) ratio of 18.8! Sure, considering rival Nio (NYSE:NIO) sports a P/S ratio of 34.2, this doesn’t look too unreasonable. But, that doesn’t mean its reasonably priced.

Yes, present results aren’t what investors are valuing this stock on. But, even when factoring for growth, it’s obvious investors have gotten carried away, with this stock fully in bubble mode. The question is, “when will this bubble burst?” Sure, it hasn’t popped yet, but that doesn’t it mean we aren’t getting close.

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Growth estimates may imply Xpeng has extensive runway ahead. But, taking a closer look at the factors that would help facilitate this, its possible investors today are overestimating its prospects.

So, what’s the call? Given the runaway bull market in EV stocks, don’t go short. But, wait for a big pullback before entering a position.

XPEV Stock, Recent Earnings, and Going Parabolic

What’s behind this stock’s epic rise since Nov 1? Chalk it up to political changes, along with the company’s recent earnings report.

Yet, does either development really make XPEV stock worth twice what it was worth just a few weeks prior? It’s questionable. With regards to the political catalyst (Joe Biden winning the U.S. Presidency), I don’t see how much this materially improves its near-term prospects.

Sure, the specter of a President less hostile towards China may be good news, if it intends down the road to enter the U.S. market. But, for now, it’s success in its home market that matters more than political changes in the United States.

Regarding the other major factor (last week’s quarterly earnings release), one can argue the results justify the recent run-up in its share price.

With wider-than-expected losses, profitability remains a work in progress. But, with growth the name of the game, investors have focused their attention to the top line numbers. And, with revenue soaring 342.5% from the prior year’s quarter, they weren’t disappointed.

Analyst consensus calls for sales to continue surging, from an estimated $806 million this year, to $2.06 billion in 2021. Losses will continue in 2021, but are set narrow compared to 2020.

Yes, strong growth numbers could mean there’s more to Xpeng’s rising share price than just speculation. But, after going up so much, so fast, additional near-term gains may not be in the cards. Not only that, taking a closer look at the two factors driving Chinese EV stocks higher, and it is clear, future results may fail to meet current investor expectations.

Speculators Could Be Overestimating Its Growth Prospects

Right now, it seems there is little to take the wind out of Chinese EV stocks. The prospects of surging sales in China, plus the specter of a less hostile U.S Government opening the door to overseas expansion, look solid.

Yet, who’s to say speculators aren’t overestimating how much these factors will boost XPEV stock going forward? Firstly, the “surging Chinese sales” narrative. Sure, this company saw its September 2020 deliveries climb 145%, from the prior year’s quarter.

Yet, how much of this was due to pent-up demand caused by the novel coronavirus? When the pandemic was at its worst during the first quarter (Q1) of 2020, Chinese EV sales crashed, quickly rebounding as the country entered recovery mode. Only time will tell whether Chinese EV deliveries will continue to surge at the levels seen in the past few months.

Secondly, the prospects of a U.S. government less hostile to China. There’s little evidence to show that a Biden administration would reverse the tariffs and restrictions imposed during the Trump years. In turn, not much to back up the idea Chinese EV names like XPeng face fewer hurdles with President Trump out of the way.

With the potential upside from both factors overestimated by investors, shares could take a big hit if it’s clear today’s speculation doesn’t match up with reality. In short, good reason why buying shares while they remain “too hot to touch” isn’t the right move.

Don’t Bet Against It, But If You Want to Buy, Wait for A Pullback

Given investors continue to “buy on the rumor, buy more on the news” when it comes to EV stocks, it’s too risky to go short this name right now. But, that alone doesn’t mean its wise to go long Xpeng, either, at today’s prices.

So, if you shouldn’t go long (or short) at today’s price, what should you do with XPEV stock? Sit things out for now. You could have a much better entry point down the road.

On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.

Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.

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