Are NIO, LI & XPEV Worth the Wager Post Q2 Results?

Not too long ago, Tesla TSLA was the only notable name in the electric vehicle (EV) space. Nevertheless, over the last couple of years, considering heightening climate concerns and Tesla’s massive success, legacy automakers have started pouring billions of dollars to electrify their portfolio. Pure-play EV startups have also been on the rise as investors seem to be intrigued by automakers who are fast changing their gears to electric.

Among the nations, China is the world’s biggest EV market that is currently backed by government stimulus measures and advancement of the EV charging infrastructure owing to state-of-the-art technologies. Importantly, the country projects EVs to account for 25% of new car sales by 2025, as opposed to just around 5% currently. China Passenger Car Association projects new energy vehicle sales in the country to hit 2.4 million units this year, indicating an increase from around 1.3 million units in 2020.

Amid this booming e-mobility landscape in the nation, let’s see how the popular China-based EV players including NIO Inc. NIO, Li Auto LI, and XPeng XPEV are faring. Each of these three EV makers posted improved year-over-year results for second-quarter 2021. But are these stocks attractive investment options at the moment?

Comparing NIO, LI & XPEV

NIO, being dubbed as the “Tesla of China”, is indeed a more popular name when it comes to China-based EV makers. ES6, ES8, and EC6 models are enhancing the firm’s prospects. Next year, the firm intends to deliver three new products based on NIO Technology Platform 2.0, including the ET7 model. We like the firm’s battery swapping technology, expansion efforts, and efforts to make headway into autonomous driving. NIO has taken the driverless technology game a notch higher with the Aquila NAD (NIO Autonomous Driving) system.

Li Auto and XPeng are touted as the rising stars of China’s EV industry. Both the companies went public two years later than NIO. Li Auto debuted on Nasdaq on Jul 30, 2020, becoming the second China-based EV maker to be listed on the U.S. stock market after NIO. XPeng made its debut on the U.S. stock market on Aug 27, 2020.

Li Auto currently has only a single offering, an e-SUV named Li One, which is equipped with an onboard gasoline generator that supplements battery and acts as a range extender. The company continues to capitalize on the growing demand for EVs by expanding its retail store footprint to 97 stores that are operational across 64 cities along with 167 servicing centers. However, in terms of automated driving technology, Li Auto seems to be lagging behind NIO and XPeng.

As for XPeng, the firm’s key EV models include G3 SUV and P7 sedan. Its third mass-produced model, the P5, equipped with LIDAR technology and XPILOT 3.0, will be officially launched in China this month, with deliveries commencing in fourth-quarter 2021. As of Jun 30, 2021, XPeng operated a total of 200 stores and 64 service centers, spanning 74 cities. The company is indeed making considerable progress in the AV space.

As far as the Zacks Consensus Estimate for 2021 sales growth is concerned, XPeng takes the lead. The consensus mark for XPeng’s 2021 sales implies year-over-year growth of 188%, while that of NIO and Li Auto indicates a 119% and 89.4% improvement, respectively.

Before evaluating which/any of these stocks are worth buying, let’s glance through their recent quarterly reports to get a clearer idea of their key financial metrics.

Second-Quarter Highlights & Third-Quarter Projections

While strong deliveries aided top-line growth of NIO, Li Auto, and XPeng, escalating operating expenses as well as cost of sales resulted in net loss for the firms in second-quarter 2021.

NIO’s loss per American depositary share (ADS) narrowed to 7 cents a share from 16 cents incurred in the second quarter of 2020. Revenues jumped 127.2% year over year to $1,308.4 million on robust deliveries of 21,896 units, which surged 111.9%. Meanwhile, R&D and SG&A costs surged 62.1% and 59.9%, respectively, on a year-over-year basis. Cash and cash equivalents totaled $2,694 million as of Jun 30, 2021. Long-term debt was $1,516.5 million, representing a long-term debt to capitalization of 27%.

Li Auto’s loss per ADS narrowed 90% year over year to 4 cents for the quarter under review. Revenues soared 158.7% year over year to $780.4 million on deliveries of 17,575 units, 166.1% higher than the comparable year-ago period. Meanwhile, R&D and SG&A costs skyrocketed 224% and 256%, respectively, on a year-over-year basis. Cash and cash equivalents totaled $1,873.4 million as of Jun 30, 2021. Long-term debt was $861.4 million, representing a long-term debt to capitalization of 16%.

XPeng’s loss per ADS also narrowed to 23 cents or RMB1.50 from the year-ago loss of RMB 6.29. Revenues were up a whopping 536.7% year over year to $582.5 million on deliveries of 17,398 vehicles, jumping 439% year over year. Meanwhile, R&D and SG&A costs skyrocketed 170% and 116%, respectively, on a year-over-year basis. Cash and cash equivalents totaled $2,392.1 million as of Jun 30, 2021. Long-term debt was $247.2 million, representing a long-term debt to capitalization of 5%.

Clearly, balance sheet strength is tilted toward XPeng. As for operating cost, it is flaring for all three companies and the trend will continue amid new products and technologies launch, expansion initiatives along with marketing activities.

Another metric worth noting is the vehicle margin. While the vehicle margin for NIO, Li Auto and XPeng witnessed a massive year-over-year improvement on higher volumes and average selling price, XPeng lags behind the other two firms on this front. While the vehicle margin for NIO and LI Auto was 20.3% and 18.7%, respectively, the same for XPeng was 11% for second-quarter 2021.

While all the firms have provided an upbeat outlook for the third quarter, year-over-year growth expectation for Li Auto’s third-quarter deliveries and revenues is more impressive.

NIO expects third-quarter 2021 deliveries in the band of 23,000-25,000 vehicles, signaling an uptick in the range of 88.4-104.8%. Revenues are envisioned between RMB 8.9 and RMB 9.6 million, indicating a year-over-year jump of 96.9-112.8%.

XPeng anticipates deliveries in the band of 21,500-22,500 vehicles, signaling a year-over-year uptick in the range of 150.6-162.3%. Revenues are envisioned in the range of RMB 4.8-5 billion, indicating a year-over-year jump of 141.2-151.3%.

Li Auto forecasts third-quarter 2021 deliveries in the band of 25,000-26,000 vehicles, signaling a year-over-year uptick in the range of 188.7-200.2%. Revenues are envisioned in the range of RMB 6.98-7.25 billion, indicating a year-over-year jump of 177.8-188.9%.

Still Not Attractive at Current Price Levels

So, ultimately, which is the stock that you should be placing your bets on? Well, each of these stocks seems pretty expensive at the moment. On the basis of the forward 12-month price-to-sales ratio, NIO, Li Auto, and XPeng are trading at 7.67, 6.33, and 9.49, respectively, versus the industry’s 0.60. While XPeng currently carries a Zacks Rank #3 (Hold), NIO and Li Auto are currently Zacks Rank #4 (Sell) firms. None of these stocks display a favorable VGM Score. While NIO and Li Auto carry a VGM Score of D, XPeng carries a VGM Score of F.

None of these companies have managed to turn a profit yet, as rising operating costs and R&D expenses are weighing on their margins. NIO, Li Auto, and XPeng — which are relatively new players — are also facing tough competition from EV behemoth Tesla, which is the leader in the China EV market driven by ramped-up production at Shanghai gigafactory. Additionally, the prevailing shortage of semiconductor supply — which has already started affecting production in China — remains a near-term headwind for all these firms. Thus, it’s not recommended to invest in any of these stocks now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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