The Importance of Free Cash Flow for Chinese EV Maker XPeng

Chinese electric vehicle (EV) maker XPeng has caught the attention of the market by consistently generating free cash flow. This milestone has prompted BofA Securities analyst Ming Hsun Lee to upgrade XPeng's stock to Buy from Hold, with a new price target of $22 per share (up from $16.30).

One of the key factors behind this upgrade is the surprise $700 million investment from Volkswagen in XPeng, which was announced in July. This infusion of cash not only improves XPeng's finances but also serves as an endorsement of the company's self-driving technology. Lee believes that with more financial support from Volkswagen and increased collaboration on product development, XPeng will be able to achieve profitability and positive free cash flow by 2025.

As a result of this positive news, XPeng's U.S.-listed American Depository Receipts (ADRs) have seen a 5.3% increase in premarket trading. Additionally, the overall market sentiment is also positive, with S&P 500 and Nasdaq Composite futures up by 0.5% and 0.6%, respectively.

The consensus call on Wall Street suggests that XPeng's forecasted achievement of positive free cash flow by 2025 is about a year earlier than expected. This is a significant metric, particularly for EV manufacturers, as positive free cash flow enables companies to fund their own growth.

XPeng finds itself in good company among the few EV makers that consistently generate free cash flow, such as Tesla, BYD, and Li Auto. These industry leaders are collectively valued at over $800 billion and have experienced an average increase in share prices of approximately 45% year to date.

EV Startups Face Financial Challenges

A cluster of seven electric vehicle (EV) startups, including XPeng, Rivian Automotive (RIVN), Fisker (FSR), Lucid (LCID), Lordstown Motors (RIDEQ), Nikola (NKLA), and NIO (NIO), have struggled to generate free cash flow. Collectively, these startups are currently valued at less than $100 billion, and their shares have experienced an average decline of 4% year-to-date.

Unfortunately, Lordstown Motors had to file for Chapter 11 bankruptcy earlier this year, further highlighting the financial hurdles faced by these EV companies.

However, XPeng seems to be in a more stable position. At the end of the second quarter, it had a substantial cash reserve of nearly $5 billion. Coupled with the recent investment from Volkswagen, XPeng can breathe easy in terms of near-term cash concerns.

Since the VW investment, market sentiment surrounding XPeng has improved. Approximately 61% of analysts covering the company now rate its shares as a Buy, surpassing the average Buy-rating ratio for stocks in the S&P 500, which stands at around 55%. Prior to the VW investment, only 55% of analysts had rated XPeng's shares as a Buy.

With this growing optimism, the average analyst price target for XPeng has risen to approximately $15 per share. This is a significant increase from the previous target of less than $9 per share before the VW investment.

Interestingly, XPeng's current stock price has closely aligned with this $15 target. After experiencing a volatile surge following the VW investment, with prices fluctuating between $8 and $23 per share, the stock has now stabilized around the $15 mark.

In conclusion, while many EV startups continue to face financial challenges, XPeng stands out as a promising player in the industry. With a solid cash position and growing analyst support, XPeng's prospects are looking brighter.