XPeng: Beware the Post-Earnings Relief Rally
XPeng Inc. (NYSE:XPEV) reported third-quarter earnings on Nov. 30. Despite falling short of analysts expectations, shares of the Chinese electric vehicle manufacturer soared in the session following the latest earnings print.
The stock's remarkable rally off of less-than-stellar earnings has left some analysts and commentators scratching their heads. However, taking a closer look at the psychological forces governing the stock can shed some light on the situation.
Earnings leave much to be desired
Based on the numbers, XPeng had little to celebrate in the third quarter. The automaker delivered just 29,570 vehicles. While this represented a 15% increase from the same period last year, it also marked a 14% decline sequentially.
XPengs weak deliveries result was accompanied by equally weak earnings. Most analysts expected another significant loss for the company, which has burned cash at a strong clip throughout its existence. However, it still managed to fall short of the analysts already muted expectations, missing on both the top and bottom lines. The company reported $961 million in revenue, about 6% short of the consensus estimate. This resulted in a net loss to the tune of $335 million, nearly 14% more than analysts had predicted.
Management tried to put a good face on the results, pointing to efforts to improve operations going forward. In the earnings press release, the company's honorary vice chairman and president, Dr. Hongdi Brian Gu, promised significant positive change.
We will implement prudent cost control initiatives and improve operational efficiency," he said. "As we plan a number of upcoming product and technology rollouts, we are confident that we can achieve significant improvement in both sales volumes and average selling price.
While such statements are undoubtedly welcome given the current shaky state of XPengs economics, they are contradicted somewhat by the companys own forward guidance. XPeng now expects to deliver between 20,000 and 21,000 vehicles in the fourth quarter, a sign of falling expectations. Even if the company achieves the high end of the guidance, it would still be a 49.7% decrease from the same period in 2021.
Animal spirits drive relief rally
Given XPengs lackluster third-quarter performance, one might well expect the market to react negatively. Yet that was not the case. In fact, XPeng saw its stock soar, rising as much as 47% during the trading session following the earnings announcement. The rally has continued in the days since; as of the close on Dec. 2, XPeng is up nearly 55% since reporting earnings.
One might well wonder what could possibly have caused such a spectacular rise following such an anemic earnings print. The principal answer seems to be pure psychological relief. The latest pandemic-related lockdowns have caused considerable disruption to Chinas economy and markets. Lockdowns and other restrictions have harmed many manufacturers, including EV makers, as production has been stalled, supply chains strained and consumer demand dampened.
XPeng was far from immune to these macro issues, and its stock was punished accordingly, losing more than 85% of its value from the start of the year to Nov. 29. After spending much of 2022 getting beaten down, many XPeng investors were looking for any reason to hope. Reports this week that the Chinese government is beginning to loosen pandemic restrictions significantly appears to have re-energized investor confidence. According to Automobilitys Bill Russo, XPengs rally may be best explained by this resurgence of confidence:
[XPeng rallied] probably because the markets have punished them and that this somehow puts the bad news in the rear view mirror and represents the bottom.
The stock appears to have surged on the basis of management commenting that the bottom is in sight for deliveries. This has rejuvenated hope among battered investors.
My take
XPengs recent rally has carried its market capitalization back up over $10 billion. That is hardly a conservative valuation for a company that still produces only a few thousand vehicles each quarter, and which continues to lose money with every sale. Indeed, XPengs net loss in the third quarter was considerably larger than during the same period last year.
Even at its nadir, XPeng had quite a lot of growth priced in. The latest jolt of market confidence may give it some momentum, carrying the small EV maker even higher in the relative short run. However, I would caution investors to think carefully about their exposure to a stock that is rallying on the basis of psychological relief rather than rational fundamentals. To achieve the level of long-term success already priced into its stock, XPeng will have to execute very well in the years ahead.
Moreover, XPeng will need to contend with intensifying competition in the EV market, which is fast reaching a fever pitch. With almost all players in the Chinese EV space, including luxury brands, actively competing on price already, the company may struggle to establish and maintain a sustainably profitable niche in a crowded field.
This article first appeared on GuruFocus.
