Intensifying AI And Automotive Investments Will Challenge Margins But Promise Future Gains

Key Takeaways

• Strategic focus on AI and globalization may compress short-term profit margins due to increased R&D and expansion-related expenses.
  
• Extensive investments in new technologies and international expansion could delay profitability and strain financial resources in the near term.
  
• Record vehicle deliveries, AI advancements, and international expansion boost XPeng's growth, improving revenues, margins, and global market presence through strategic collaborations.

Catalysts

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

• The CEO's commitment to enhancing AI and automotive technology, as well as globalization, may lead to substantial R&D expenditures, potentially compressing profit margins in the short term despite anticipated long-term revenue growth.
  
• The transition of XPeng's strategy to focus on AI technologies, including AI-powered vehicles and humanoid robots, could significantly increase R&D expenses, delaying profitability as resources are reallocated from current operations to future developments.
  
• Plans to mass-produce and deploy the in-house developed Turing chip may increase capital expenditure and operational complexity. While it could lead to future revenue enhancement and efficiency gains, the near-term impact could strain earnings as the company invests heavily in this technology.
  
• XPeng’s aggressive expansion into international markets, including doubling sales outlets, could elevate SG&A expenses and impact net margins as the company invests in infrastructure and marketing to establish a global presence.
  
• The forecast of AI-driven product launches every quarter starting 2025 suggests potential strain on manufacturing and supply chains, which might increase costs and lower net margins in the near term as the company works to meet production demands.

XPeng Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XPeng's revenue will grow by 33.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -14.2% today to 2.8% in 3 years time.
• Analysts expect earnings to reach CN¥2.7 billion (and earnings per share of CN¥0.58) by about March 2028, up from CN¥-5.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥4.9 billion in earnings, and the most bearish expecting CN¥547 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 73.2x on those 2028 earnings, up from -26.8x today. This future PE is greater than the current PE for the US Auto industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.7%, as per the Simply Wall St company report.

XPeng Future Earnings Per Share Growth

Risks

• XPeng's record vehicle deliveries and steady improvement in vehicle margins suggest a strong growth trajectory, potentially leading to increased revenues and net margins.
  
• The development of AI and autonomous driving technology, including XPeng's confidence in leading the L3 capabilities, could enhance its market position and drive sales, positively impacting earnings.
  
• International market expansion and doubling store numbers worldwide indicate potential revenue growth through increased global sales and market penetration.
  
• The mass production of self-developed Turing chips and AI vehicle technologies can reduce costs and improve profit margins through economies of scale and integration.
  
• Collaborations, such as those with Volkswagen and possible manufacturing efforts in overseas markets, could strengthen global market presence and drive long-term revenue growth.

Valuation

• The analysts have a consensus price target of $19.908 for XPeng based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.08, and the most bearish reporting a price target of just $7.01.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥96.2 billion, earnings will come to CN¥2.7 billion, and it would be trading on a PE ratio of 73.2x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of $22.64, the analyst price target of $19.91 is 13.7% 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.