How Xpeng’s Bet On Premium Vehicles And Services Is Paying Off

Chinese luxury electric vehicle maker Xpeng stock (NYSE:XPEV) posted a better-than-expected set of Q1 2024 results.  Net losses came in narrower than expected at about $0.10 per share, while revenue grew by 62% to RMB 6.55 billion (about $910 million) driven by an expanding ramp-up of sales of the X9 multi-purpose vehicle which was launched in early January. Xpeng is also seeing its average revenue per vehicle rise, to about $42,000, up from just about 28,000 in the year-ago quarter. This is largely due to a higher mix of sales of the X9 vehicle which costs over $50,000. Xpeng’s gross margins have also picked up, coming in at 13%, up from under 3% in the year-ago quarter. The stronger margins performance is largely due to higher sales of technical services (up almost 2x versus last year to $140 million), following the company’s collaboration with the Volkswagen Group relating to platform and software.  Things are likely to remain strong in Q2 as well, with Xpeng projecting that it could sell between 29,000 and 32,000 vehicles, marking an increase of about 38% year-over-year at the upper end of guidance.

While Q1 results were better than expected, Xpeng’s stock has been a weak performer. Returns for the stock were 18% in 2021, -80% in 2022, and 47% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that XPEV underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could XPEV face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

There are concerns about global EV demand, with most mainstream automakers seeing tepid demand and scaling back on their electrification goals. However, things could be a bit better in China, where the industry sees meaningful government support.  China recently announced new incentives of RMB 10,000 (about $1,410) for consumers to trade their older gasoline cars for electric and low-emission vehicles by year-end. However, competition and price wars are mounting. Even EV bellwether Tesla reportedly scaled back production at its plant in Shanghai amid rising competition.

That said, there are some positives as well for Xpeng. The company is seen as a strong player in the self-driving software space. In March, the company said that its XPeng navigation guided pilot (XNGP) feature, which enables self-driving in several scenarios, would be available across China, for use on all roads. The offering was initially available only for highway driving scenarios. The company also said that the adoption rate for its advanced driver-assistance system (ADAS), reached 82% in urban driving scenarios. The company also plans to launch more than 10 brand-new models over the next three years, while also partnering with Volkswagen to co-develop VW-branded EVs in a strategic partnership. Xpeng also intends to move beyond the luxury market toward more mass-market models. The company plans to launch its new sub-brand Mona in the next few months, with the vehicles expected to be priced under RMB 150,000 yuan ($21,000), allowing it to compete head-on with the likes of BYD for much bigger volumes. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Xpeng stock compares with its rivals Li Auto and Nio.

[1] Returns as of 5/22/2024
[2] Cumulative total returns since the end of 2016

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