Morningstar Equity Research reiterates its “BUY” rating for XPeng Inc. (NYSE: XPEV), raising the fair value estimate to $15.20 per share, signaling an approximate 21% upside from its current trading price of $12.52. This revision reflects robust vehicle delivery growth and an enhanced model lineup despite ongoing challenges in margins and competitive pricing pressures in the electric vehicle (EV) market.

Summary

XPeng Inc., a leading Chinese electric vehicle manufacturer, has been recognized for its technological advancements in autonomous driving and competitive pricing strategy. In its latest quarterly earnings report, XPeng showcased 7% revenue growth beyond midpoint guidance, with vehicle margins recovering to 8.6%. The company’s robust new model cycle, including the Mona M03 sedan and P7+, underpins Morningstar’s optimism. However, challenges such as margin pressures and increased competition remain pivotal concerns for investors.

Q3 FY2024 Performance

1. Revenue in Line with Guidance:
XPeng reported quarterly revenue growth of 7%, aligned with expectations, driven by increased vehicle deliveries and lower battery costs.

2. Vehicle Margin Recovery:
Vehicle margins improved to 8.6% from 6.4% in the previous quarter, attributed to enhanced operational efficiency. However, aggressive price promotions limited margin expansion.

3. Forward Guidance:
For Q4 FY2024, XPeng anticipates a 45%-51% year-over-year increase in vehicle deliveries, translating to 87,000-91,000 units. This guidance implies sustained growth momentum.

Strategic Drivers of Growth

1. Robust New Model Pipeline:
The Mona M03 sedan achieved 10,000 monthly deliveries within a month of launch, while the newly introduced P7+ midsize sedan has received strong order intakes.

2. Autonomous Driving Leadership:
XPeng continues to lead in autonomous driving with its proprietary Xpilot software, offering features like Level 3 autonomy and advanced parking capabilities, which are well-suited to Chinese road conditions.

3. Expansion in Production Capacity:
The Zhaoqing facility’s production capacity is expected to double to 200,000 units annually, with additional plants in Guangzhou and Wuhan coming online soon.

Revised Fair Value Estimate

1. Fair Value Upgrade:
Morningstar has raised the fair value estimate to $15.20, reflecting a price-to-sales ratio of 1.9x for 2025. The revision incorporates higher vehicle delivery forecasts and enhanced profitability assumptions post-2026.

2. Long-term Growth Outlook:
Revenue is projected to grow at a compound annual growth rate (CAGR) of 26% from 2023-2028, with operating margins turning positive by 2026.

3. Investment Thesis:
Despite short-term pressures, Morningstar views XPeng’s focus on scaling production and technology as key drivers of sustainable long-term value.

Risks and Challenges

1. Competitive Pricing Pressures:
XPeng faces intense competition in the mass-market EV segment, necessitating aggressive price discounts that may constrain future margin recovery.

2. Regulatory Uncertainty:
Autonomous driving advancements remain susceptible to evolving regulations and public scrutiny, which could impact rollout timelines.

3. Capital-Intensive Operations:
High fixed costs and the need for continuous investment in production capacity and R&D increase XPeng’s reliance on external financing.

Investor Takeaways

1. Entry Point:
At its current price of $12.52, XPeng shares trade at an 18% discount to the revised fair value, presenting an attractive entry opportunity for long-term investors.

2. Suitable for Growth-Oriented Investors:
XPeng’s focus on autonomous technology and market share growth in China’s NEV market makes it a strong pick for those with a higher risk tolerance.

3. Target Price:
Morningstar’s revised target of $15.20 underscores the stock’s potential for capital appreciation as XPeng progresses toward profitability.