Investment In AI And New Energy Vehicles Will Expand Future Market Reach

Key Takeaways

• Investment in AI and new energy vehicle technology aims to enhance product experience, driving revenue and profitability through innovation and market expansion.
  
• Strategic global expansion and technology-driven cost strategies are expected to improve sales and net margins, boosting overall financial growth.
  
• Limited global infrastructure and reliance on external dealers may hinder XPeng's overseas market effectiveness, impacting revenue and market penetration.

Catalysts

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

• XPeng is focusing on leveraging AI to enhance product experience and cost efficiency, which is expected to improve their competitive edge and potentially expand revenue through more advanced autonomous driving features.
  
• New product launches, including the world’s first AI-defined car, P7+, and several new models planned for 2025 are expected to boost sales, reflecting a significant anticipated growth in revenue.
  
• Plans to implement technology-driven cost reduction strategies and achieve double-digit gross margins for next-generation models are likely to improve net margins.
  
• The company’s strategic global expansion into more markets, increasing sales stores, and successful export sales could significantly contribute to future revenue and profitability.
  
• XPeng's investment in new energy vehicle technology, including the dual-energy approach with pure electric and super electric powertrains, aims to tap into broader markets, which could drive substantial growth in revenue and help achieve profitability through scale.

XPeng Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming XPeng's revenue will grow by 31.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -15.4% today to 4.4% in 3 years time.
• Analysts expect earnings to reach CN¥3.7 billion (and earnings per share of CN¥-3.19) by about December 2027, up from CN¥-5.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CN¥10.7 billion in earnings, and the most bearish expecting CN¥-4.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.4x on those 2027 earnings, up from -15.2x today. This future PE is lower than the current PE for the US Auto industry at 21.6x.
• Analysts expect the number of shares outstanding to grow by 0.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.1%, as per the Simply Wall St company report.

XPeng Future Earnings Per Share Growth

Risks

• XPeng's limited global infrastructure and reliance on external dealers for distribution could limit its ability to capture overseas market effectively, potentially impacting revenues and market penetration.
  
• Variability in government subsidies, both domestic and international, can affect consumer demand and sales volumes, which could ultimately impact XPeng’s overall revenue projections.
  
• Despite gross margin improvements, ongoing losses from operations and a net loss for the third quarter suggest that substantial profitability remains unachieved, posing a risk to earnings sustainability.
  
• The dependency on rapid advancement and cost-efficient production of AI and autonomous driving technology presents execution risks, which could impact net margins if not realized efficiently.
  
• Variability in supply chain, specifically concerns over component manufacturing such as semiconductor availability, could restrict production capacity and delivery, affecting XPeng’s ability to maintain expected revenue growth.

Valuation

• The analysts have a consensus price target of CN¥14.57 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 CN¥18.12, and the most bearish reporting a price target of just CN¥6.99.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥85.0 billion, earnings will come to CN¥3.7 billion, and it would be trading on a PE ratio of 5.4x, assuming you use a discount rate of 12.1%.
• Given the current share price of CN¥12.79, the analyst's price target of CN¥14.57 is 12.2% higher.
• 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.