Estimating The Fair Value Of XPeng Inc. (NYSE:XPEV)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, XPeng fair value estimate is US$11.48
• XPeng's US$12.05 share price indicates it is trading at similar levels as its fair value estimate
• The CN¥14.53 analyst price target for XPEV is 27% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of XPeng Inc. (NYSE:XPEV) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for XPeng

What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CN¥, Millions)	CN¥2.16b	CN¥3.75b	CN¥5.08b	CN¥6.38b	CN¥7.57b	CN¥8.62b	CN¥9.52b	CN¥10.3b	CN¥11.0b	CN¥11.5b
Growth Rate Estimate Source	Analyst x4	Analyst x4	Est @ 35.38%	Est @ 25.55%	Est @ 18.67%	Est @ 13.86%	Est @ 10.48%	Est @ 8.13%	Est @ 6.47%	Est @ 5.32%
Present Value (CN¥, Millions) Discounted @ 12%	CN¥1.9k	CN¥3.0k	CN¥3.6k	CN¥4.1k	CN¥4.3k	CN¥4.4k	CN¥4.3k	CN¥4.2k	CN¥4.0k	CN¥3.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥38b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CN¥12b× (1 + 2.6%) ÷ (12%– 2.6%) = CN¥128b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥128b÷ ( 1 + 12%)¹⁰= CN¥42b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥79b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$12.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at XPeng as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 12%, which is based on a levered beta of 1.862. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for XPeng

Next Steps:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For XPeng, there are three important factors you should further research:

1. Risks: To that end, you should be aware of the 2 warning signs we've spotted with XPeng .
2. Future Earnings: How does XPEV's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.