The XPeng (NYSE: XPEV) share price has been extremely volatile since its IPO in August 2020. In November, it had risen around 250% to $72. Nonetheless, it has since fallen to around $38, mainly due to a sell-off of many growth stocks. As such, is this the perfect opportunity to buy the shares or are they still too expensive?
Reasons to buy shares
There is no dispute that XPeng has a ton of potential. The EV maker has managed to consistently increase production, with 6,565 vehicles being delivered in the month of June. This is a 617% increase year-on-year. Such a figure is extremely impressive and has seen the XPeng share price rise as a result. It is also a sign that the global semiconductor shortage is starting to subside.
There are also signs that there is significant demand, and this is increasing every year. In fact, according to Schroders, EVs are expected to make up 50% of all new car sales in China by 2035. In 2020, just 6.3% of sales were EV cars. This demonstrates the huge growth potential of the market, boding very well for Chinese EV companies such as XPeng.
What are the risks?
Although the growth potential is clear, risks also abound. For example, there is the risk of higher inflation, which may cause the US Federal Reserve to raise interest rates. When interest rates rise, growth stocks are usually the most severely affected. This is because it increases borrowing costs and input costs, while also reducing future earnings. Therefore, this could lead to some downward pressure on the XPeng share price.
Another risk revolves around the current tensions between China and the US. In fact, after the Chinese regulators accused DiDi of illegally collecting personal data, there have been some discussions in Beijing of banning Chinese companies from US listings. Although it is not overly clear what effect this will have on XPeng and other Chinese EV companies, it could prevent them from issuing more shares in the US. This would cut off a substantial source of funding.
Finally, the XPeng share price may suffer due to the competition. In fact, there are already a number of EV makers capitalising on the high demand. These include established companies in the US such as Tesla, alongside newer companies coming to the market like Lucid Motors. In China, XPeng also faces tough competition from NIO and Li Auto in particular. This may hinder growth in the long term.
Is the XPeng share price a great opportunity?
Overall, I am very impressed with XPeng. It has managed to grow production levels significantly and demand is clearly rising. Despite this, I am not going to buy. Although the company has seen significant revenue growth over the past few years, it still cannot make a profit and has been cash flow negative for the past three years. Until there are signs that this can be turned around, XPeng shares are too much of a risk for me. I’m therefore looking elsewhere.
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended NIO Inc. and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.