Tariffs And Supply Chain Woes Will Erode EV Margins

Key Takeaways

• Global protectionism and rising tariffs may hinder overseas expansion and limit revenue diversification, impacting future growth prospects.
  
• High costs for R&D and intensified price competition threaten profitability, while slow adoption of advanced features could constrain software-related revenue.
  
• XPeng's volume growth, global expansion, and investment in advanced technology are strengthening its competitive position, diversifying revenue streams, and supporting long-term profitability.

Catalysts

Designs, develops, manufactures, and markets smart electric vehicles (EVs) in the People’s Republic of China.

• Over the next several years, XPeng's reliance on continued rapid overseas expansion could be derailed by escalating global protectionism and higher tariffs on Chinese EVs in key markets such as Europe, severely limiting revenue diversification and future topline growth from international markets.
  
• As the EV industry wrestles with vulnerabilities in global supply chains and the risk of resource nationalism around critical battery materials, XPeng may face surging input costs and potential production disruptions, which would materially compress gross margins and delay profitability.
  
• The expected surge in high R&D and AI development expenditures, driven by XPeng's aggressive multi-front push into advanced vehicle autonomy, chips, and robotics, threatens to erode net margins and prolong negative earnings well into the future, particularly if monetization of these technologies lags or uptake underwhelms.
  
• Intensifying domestic and international price competition-exacerbated by new China-for-China EV launches from Japanese and Western automakers with aggressive localization strategies-could force XPeng into a sustained price war, driving average selling prices lower and further reducing gross profit per vehicle.
  
• Despite large investments in AI and connectivity, a slower-than-anticipated consumer adoption of advanced autonomous features or recurring digital services would constrain XPeng's ability to unlock high-margin software revenue streams, limiting future earnings scalability and capping long-term return on invested capital.

XPeng Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on XPeng compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming XPeng's revenue will grow by 28.7% annually over the next 3 years.
• The bearish analysts are not forecasting that XPeng will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate XPeng's profit margin will increase from -10.1% to the average US Auto industry of 5.4% in 3 years.
• If XPeng's profit margin were to converge on the industry average, you could expect earnings to reach CN¥5.8 billion (and earnings per share of CN¥5.96) by about August 2028, up from CN¥-5.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.3x on those 2028 earnings, up from -27.2x today. This future PE is greater than the current PE for the US Auto industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 0.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.88%, as per the Simply Wall St company report.

XPeng Future Earnings Per Share Growth

Risks

• XPeng has achieved record vehicle deliveries with a 331% year-over-year increase and maintained monthly sales above 30,000 units for six consecutive months, driven by a strong new product pipeline and upgrades; this sustained volume growth can positively impact future revenues and support long-term profitability.
  
• The company's gross margin has improved for seven consecutive quarters-reaching a record high of 15.6% in Q1 2025-due to product mix upgrades, economies of scale, and extensive in-house cost optimization, which suggests a structural path to margin expansion and potential net earnings improvement.
  
• XPeng is executing a global expansion, with overseas deliveries surging and new stores opened in key markets across Europe, the UK, and Southeast Asia; management expects this international business to become a substantial contributor to both revenue and profits, reducing dependence on the domestic market and lowering earnings volatility.
  
• Heavy investment in proprietary AI, autonomous driving, and in-house Turing chips has accelerated XPeng's leadership in next-generation automotive technologies, which creates sustainable competitive barriers and enables the company to target premium pricing and create recurring software-based revenue streams, bolstering gross margins and future earnings scalability.
  
• A robust cash position (RMB 45.3 billion) and improving operating cash flow, combined with partnerships like the collaboration with Volkswagen, position XPeng for continued innovation, global expansion, and potential profitability by Q4 2025, which can drive positive sentiment and future share price appreciation.

Valuation

• The assumed bearish price target for XPeng is $18.05, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of XPeng's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.63, and the most bearish reporting a price target of just $18.05.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥106.8 billion, earnings will come to CN¥5.8 billion, and it would be trading on a PE ratio of 31.3x, assuming you use a discount rate of 12.9%.
• Given the current share price of $20.2, the bearish analyst price target of $18.05 is 11.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.