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While the meme stock mania of 2021 might have run its course, there are still occasional eye-popping trades to remind us of the frenzied action that characterized the post-pandemic era. Last year, Hong Kong-based fintech company AMTD Digital (HKD) went public, and soon enough its market cap surpassed $450 billion - which, for context, exceeded the valuation of Meta Platforms (META) at the time. Fast forward to 2023, and HKD not only trades below its IPO price, but its market cap is just around $1 billion.
A similar meme-stock dynamic was at play when Vietnamese electric vehicle (EV) company VinFast (VFS) went public in August through a reverse merger with special purpose acquisition company (SPAC) Black Space Acquisition Co. (BSAQ). The stock soared after the listing and printed as high as $93 – which gave the startup EV company a market cap in excess of $200 billion, roughly twice the combined market cap of Ford (F) and General Motors (GM).
The rally in VinFast stock has since faded, and it's down to just about $29 per share - but its market cap of approximately $65 billion is still higher than that of Ford.
Why Is VinFast Stock Going Down?
VinFast stock has been falling since the company’s valuation surged way above what the fundamentals warranted. VinFast delivered only about 7,400 vehicles in 2022, and while deliveries rose to 11,300 vehicles in the first half of 2023 - and it expects to sell up to 50,000 cars in the full year - the numbers don't cover its current valuation.
The company currently has an annual production capacity of 300,000 vehicles and is setting up its next plant in North Carolina, which will have a nameplate annual capacity of 150,000 vehicles.
That said, there are three main reasons that I would pass on buying VinFast stock at current levels. These include:
- VinFast cars haven’t received good reviews so far. In May, while reviewing VinFast’s VF8, Scott Evans of MotorTrend did not mince any words when he said, “I'd be embarrassed to look a customer in the eye when handing over the keys to this vehicle.”
- Second, the company has yet to build its brand in the U.S. market - and given the EV price war, the road ahead looks bumpy for startup EV companies.
- Finally, VFS looks quite overvalued even now. In its merger presentation, VinFast projected revenues of $1.875 billion for this year - which, at its current market cap, implies a 2023 price-to-sales multiple of 34.6x. That's well ahead of other startup EV companies like Lucid Motors (LCID) and Rivian (RIVN).
2 EV Stocks to Buy Instead
Even as the macro environment for startup EV companies continues to worsen amid the economic slowdown, rising competition, and the brutal price war, I believe Rivian and Xpeng Motors (XPEV) are two EV stocks worth considering.
Rivian expects to produce 52,000 vehicles in 2023, and even as many EV startups are struggling with execution, the company actually raised its production guidance. RIVN has a strong balance sheet, and $10.2 billion in cash should take care of its operations until 2025 - unlike many other startup EV companies that are struggling to fund their cash burn.
Rivian also has a strong product proposition, and its R1T pickup won MotorTrend's prestigious Truck of the Year 2022 award.
Finally, from a valuation perspective, RIVN trades at a next-12-months (NTM) price-to-sales multiple of 4x, which looks quite reasonable given the valuations of some other startup EV companies.
Xpeng Motors: A Strong Stock with Profitability in Sight
Xpeng Motors has caught the attention of not only investors, but also notable corporate partners.
In July, Volkswagen took a stake in the company, and as part of the agreement, the automakers will jointly develop two EV models. The deal will not only enhance Xpeng Motors’ brand, but also help to improve its margins in the coming quarters.
Last month, Xpeng also partnered with Chinese ride-hailing app Didi. Under the terms of the deal, Xpeng Motors took over Didi’s autonomous driving business, and will launch a new EV brand in a project named “MONA.”
Xpeng already has advanced autonomous driving operations, and is testing the service in several Chinese cities, including Beijing. The partnership with Didi will give it access to Didi's vast ecosystem in China.
The EV specialist is also looking to launch new models – including in the budget range – and is simultaneously expanding to tier 2 and tier 3 cities in China. Xpeng is also ramping up overseas shipments - which, coupled with the new partnerships, should help drive volumes.
Xpeng Motors delivered 13,690 cars in August, and while the metric remains below its all-time highs, it's moving in the right direction - deliveries have risen on a monthly basis in all months since February. The automaker expects its shipments to rise gradually, and forecasts deliveries between 39,000-41,000 in Q3 while striving for peak monthly deliveries of 20,000 in Q4.
The company also expects positive gross margins and operating cash flows in Q4. BofA Securities analyst Ming Hsun Lee, who last month upgraded XPEV from a “hold” to a “buy” and raised his target price to $22, expects the company to turn profitable and generate positive free cash flows in 2024.
In my view, with an NTM price-to-sales multiple of 2.71x and a market cap of just above $16 billion, Xpeng Motors looks like a much better bet to play the EV industry than a name like VinFast.
On the date of publication, Mohit Oberoi had a position in: XPEV , META , RIVN , F , GM . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
