Wait for a withdrawal before jumping into the Xpeng action
Electric vehicle (EV) stocks remain hot. But, so far this month, none have held a candle in China-based Xpeng (NYSE: XPEV) stock. The shares have more than doubled since November 1. As a result, stocks are now trading at a very high valuation. Source: Johnnie Rik / Shutterstock.com Based on earnings over the past twelve months, the shares are currently selling at a price / sell (P / S) ratio of 18.8! Of course, given that rival Nio (NYSE: NIO) sports a P / S ratio of 34.2, that doesn’t sound too unreasonable. But that doesn’t mean its price is reasonable. Yes, current results are not what investors value this stock on. But, even taking growth into account, it’s clear investors got carried away, with this stock all in bubble mode. The question is: “When will this bubble burst?” Of course, that hasn’t jumped out yet, but that doesn’t mean we’re not getting closer. But, taking a closer look at the factors that would help facilitate this, its potential investors are now overstating its prospects. So what’s the appeal? Given the galloping bull market in EV stocks, don’t go short. But wait for a big drawdown before entering a position. XPEV Stock, Recent Earnings and the Dish What explains the epic rise in this stock since November 1? Tackle the political changes, as well as the recent corporate earnings report. 7 Cyclical stocks still hoping for another round of stimulus Yet, are any of these developments really making XPEV stock worth twice as much as a few weeks ago? It is debatable. As for the political catalyst (Joe Biden winning the US presidency), I don’t see how much that materially improves his near-term prospects. Of course, the specter of a president who is less hostile to China may be good news, if he intends to enter the US market. But, for now, it is success in its home market that counts more than political changes in the United States. As for the other major factor (publication of quarterly results last week), it can be argued that the results justify the recent surge in its share price. With larger losses than expected, profitability remains a work in progress. But, with growth being the name of the game, investors have focused their attention on the higher numbers. And, with revenue up 342.5% from the previous year’s quarter, they weren’t disappointed. Analyst consensus calls for sales to continue increasing, from around $ 806 million this year to $ 2.06 billion in 2021. Losses will continue into 2021, but are limited compared to 2020. Yes, strong growth could mean that there is more to the growing share of Xpeng price than speculation. But, having gone up so much, so quickly, additional short-term gains may not be in the cards. Moreover, taking a closer look at the two factors that drove Chinese stocks to rise, it is clear that future results may not meet current investor expectations. Speculators May Overestimate Its Growth Prospects Right now, it looks like there isn’t much to distract Chinese stocks from VE. Prospects for increased sales in China, along with the specter of a less hostile U.S. government opening the door to overseas expansion, appear solid. Yet who can say that speculators do not overestimate how much these factors will drive XPEV stock in the future? First, the story of the “surge in Chinese sales”. Of course, this company saw its September 2020 deliveries climb 145% compared to the quarter of the previous year. Yet to what extent was this due to pent-up demand caused by the novel coronavirus? When the pandemic was at its worst in the first quarter (Q1) of 2020, Chinese EV sales slumped, rebounding rapidly as the country entered recovery mode. Only time will tell if Chinese deliveries of electric vehicles will continue to increase to levels seen in recent months. Second, the prospects for a US government less hostile to China. There is little evidence to show that a Biden administration would reverse tariffs and restrictions imposed during the Trump years. In return, not much to support the idea that Chinese EV names like XPeng face fewer obstacles with President Trump on the sidelines. With the upside potential of both factors being overstated by investors, stocks could take a hard hit if it is clear that today’s speculation does not match reality. In short, a good reason why buying stocks when they are “too hot to be affected” is not the right decision. Don’t bet against this, but if you want to buy, wait for a pullback As investors continue to ‘buy on the rumor, buy more on the news’ when it comes to EV stocks, it is too risky to sell this name correctly now. But, that alone also doesn’t mean that it’s wise to go for Xpeng for a long time at today’s prices. So if you shouldn’t go long (or short) at today’s price, what should you do with XPEV stock? Sit down for the moment. You might have a much better entry point on the road. At the date of publication, Thomas Niel did not hold (neither directly nor indirectly) any position in the securities mentioned in this article. Thomas Niel, an InvestorPlace contributor, has been writing a unique stock analysis since 2016. Learn more about InvestorPlace Why everyone is investing in 5G. Jumping Into Xpeng Stock appeared first on InvestorPlace.