XPeng Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Xpeng Inc. is a Chinese smart EV company that designs, develops, manufactures, and markets electric vehicles, focusing on technology and software integration to enhance the driving experience.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Analysis: 2 / 5

XPeng’s moat is currently weak, and therefore I gave it a 2 out of 5 rating. Here is the reasoning:

Intangible Assets (Brand): While Xpeng is gaining recognition in the Chinese EV market, its brand is not as strong as its competitors. Its brand lacks the decades-long global recognition, like that of Tesla or legacy automakers, therefore, it has no real advantage regarding price and customer loyalty. As can be seen from its latest report, the company’s revenues are concentrated in China, which indicates a weak global presence, especially considering the company is a Chinese EV manufacturer.
Switching Costs: The car industry is not known for high switching costs, so Xpeng does not really benefit here. Customers are not bound to use the company and can easily switch to its many competitors.
Network Economics: There are no clear network effects for Xpeng, although some positive feedback effects with its charging infrastructure could provide a slight benefit. The scale advantage of the company is also not well pronounced.
Cost Advantages: Xpeng’s cost structure is not yet proven to be significantly superior to its competitors. It is known that Chinese manufacturers can deliver EVs with lower cost, it is hard to say whether Xpeng does that in a better way than others. As can be seen from its financial statements, Xpeng’s gross margin is very weak.

While Xpeng has some technological advantages, which could be a potential moat, it is hard to predict which technology will dominate the market and how sustainable these advantages are. Overall, the competitive landscape in the Chinese EV market is very crowded and intense with numerous local and global competitors, meaning that Xpeng is unlikely to hold strong, durable advantages over time.

Risks to Moat and Business Resilience

Several legitimate risks could erode Xpeng’s current position and ability to generate returns:

Intense Competition: The Chinese EV market is highly competitive. Many new and established automakers are aggressively competing for market share, meaning that Xpeng’s pricing power is limited, and margins might suffer greatly.
Technological Obsolescence: Rapid technological advancements in the EV industry could quickly render Xpeng’s technology less effective. Competitors are catching up fast. It is important for Xpeng to produce continuous innovation in order to keep up.
Government Regulations: Changes in Chinese government policies, subsidies, or regulations could directly impact Xpeng’s profitability and market access.
Supply Chain Disruptions: The global semiconductor shortage and other supply chain problems can disrupt Xpeng’s production and drive up costs. Supply chain disruptions also had a material effect on the company in 2022 and they said they expect it to impact their results in 2023.
Economic Slowdown: A slowdown in the Chinese economy or global demand could reduce demand for Xpeng’s vehicles, affecting profitability and revenue growth.
Financial distress: Xpeng is making heavy investments to expand its production. These investments are made from existing debt and new equity, which can also be a risk for profitability.
Pricing Power: Xpeng is not able to establish consistent profitability, mostly because it is unable to maintain a competitive advantage on pricing. In 2022, it became obvious that Xpeng is not able to compete on pricing, as it had to cut prices in order to keep its volume. They have been trying to increase sales volume on other cheaper models. Also, to deal with declining sales, Xpeng reduced the prices of its vehicles.

Despite these risks, Xpeng demonstrates resilience through:

Innovation: The company is investing heavily in research and development to stay competitive. Their XNGP driver-assistance system and Xpilot autonomous driving features are important.
Strong Product Portfolio: Xpeng has a line of EVs in different classes. The P7 is a sedan, the G3/G3i and G6 are SUVs, and the P5 is a family vehicle. Xpeng has multiple models of vehicles, which could offset the negative impact if some models underperform.
Charging Infrastructure: Xpeng is working on its charging network in China, which may give its users the incentive to buy Xpeng cars, to take advantage of the network. The charging network also provides positive feedback loops, which increase its strength as time passes.
Growing International Expansion: Even if Xpeng is heavily dependent on Chinese demand, its international expansion will help to offset risks and give it access to a more versatile market.

Business Explanation

Xpeng Inc. is a leading Chinese smart EV company that focuses on designing, developing, manufacturing, and marketing intelligent electric vehicles. Here is a more detailed explanation:

Revenues: Xpeng generates revenues primarily through the sale of its EVs. As we can see from the recent quarterly reports, vehicle sales account for the vast majority of the total revenues. Xpeng also has a relatively small amount of revenue from other services, like service fees and charging fees. The company’s operations are nearly all in China, although they have been starting to expand to other countries.
Vehicle Sales: the sale of electric vehicles.
Service and Others: includes sales of parts, accessories, and service.
Industry Trends: The global EV market is experiencing rapid growth, driven by increasing consumer awareness of climate change, government policies encouraging EV adoption, and improving technology and charging infrastructure. China is the largest EV market in the world. However, it is an overcrowded market with many global and local competitors.
Margins: Xpeng’s gross margins are low and volatile. Despite having high revenues, it is not yet profitable. R&D costs are also a major point of expenditure. The recent quarter’s gross margins declined significantly because they had to make price cuts to maintain volume and face stiff competition. Xpeng has been struggling to increase profits, with a net loss of RMB 10 billion (roughly $1.4 billion) in the last year.
Competitive Landscape: Xpeng faces strong competition in the Chinese EV market. Its direct competitors are Li Auto, Nio, and BYD. On the international level, it has to compete with Tesla, Toyota, and other legacy automakers who are getting into the EV market. Xpeng also faces competition from traditional ICE manufacturers that are quickly transitioning to electric vehicles. Xpeng is competing in the premium market, whereas BYD is more focused on a lower price range. This can lead to a different price and cost dynamic for both.
What Makes XPeng Different:
Technological Focus: Xpeng prioritizes the development of its own core EV technology and autonomous driving capabilities. It has been trying to differentiate from the other competitors using technology.
Vertical Integration: Xpeng is trying to control the supply chain by producing its own core components, like battery packs. Vertical integration strategy also gives companies some more margin power.
Software Integration: Xpeng’s strategy puts significant emphasis on software, both on the operation and driving side. They aim to produce an intelligent driving experience.
Financial Information: Xpeng’s growth over the last few years has been massive and it has achieved rapid growth in revenues. It has been experiencing substantial growth in sales and expansion of its operations. This comes as its gross margins are relatively low, and it has had a net loss for many years. The most important reason for this is that Xpeng is spending a lot on R&D and also on operating expenditures to expand and compete. This is why Xpeng needs to keep its production costs at an acceptable level, as even large increases in revenue can be offset by rising costs.
Latest News: From the latest earning calls, it was clear that Xpeng is trying to pivot from being an innovative high-tech company to a more established one. Management mentioned that their focus is on sales volume and market penetration. Xpeng is trying to make different models more available to the Chinese market. The latest data shows a significant growth in sales figures. Xpeng also mentioned that they are increasing market efficiency for new markets by partnering with third-party distributors and exploring other strategies.

Understandability: 3 / 5

Although the business itself is not so complicated, there are several factors that can change the performance of the company, like technological innovation, consumer preferences, and government regulations. It’s not easy to tell how well Xpeng is positioned for these challenges, meaning that I can’t give it a lower rating. There are complex accounting methods and financial disclosures, that also make it slightly more difficult to understand. I rate Xpeng 3 out of 5 for understandability.

Balance Sheet Health: 3 / 5

I would rate Xpeng’s balance sheet health as a 3 out of 5 for these reasons:

Cash Position: Xpeng has a good cash position, around 4 billion USD, but its investments are a large part of its assets. It also holds a considerable amount of debt, which is used to fund operations and expansions.
Debt: Xpeng’s long-term debt-to-equity ratio is a bit high, at 1,72, which gives it more financial flexibility at the expense of a potential decline in earnings. I would not call this excessive, but it is a good point of caution. Xpeng is planning on lowering this ratio in the near future.
Debt Obligations: Most of the debts are in the form of credit and loan agreements. These debts have variable rates, which means that profitability is affected when interest rates change.
R&D Spending: Xpeng has large research and development expenditures to remain competitive and innovative. These investments are valuable in the long-run but they currently have a negative impact on earnings.
Profitability: The company is not yet profitable. As the company expands and as it matures, this problem can be solved, but the risk is still prevalent, as the company is facing heavy competition.

These elements make the balance sheet rating be a medium one. Although it’s not unhealthy, there are a few points of concern.