XPEV Stock Is a Good But Risky Bet Amid China's Tech Crackdown

There's a bloodbath in Chinese stocks on June 27. While the sell-off in tech names like Alibaba (BABA) and DiDi Global (DIDI) is understandable, we’re also seeing a sell-off in Chinese EV (electric vehicle) companies. NIO, Xpeng Motors (XPEV), and Li Auto (LI) are all deep in the red. Why are XPEV and other Chinese EV names falling and will they go back up?

XPEV stock is down almost 15 percent at 11:00 a.m. ET on July 27, which is way above other EV stocks. XPEV stock is down 21 percent YTD and is trading at a discount of 53 percent to its 52-week highs.

EV stocks have been under pressure in 2021 after the steep rise in 2020. Markets have been wary of the high valuations that these stocks were trading at. The aggressive approach that legacy automakers like Ford and General Motors have taken in their vehicle electrification plans has also led to the pivot from pure-play EV names to legacy automakers.

Talking specifically of the sell-off on July 27, China’s crackdown on its tech giants is dampening the sentiments. The country is now targeting food delivery companies and education companies. Previously, it went after DIDI over data privacy issues fearing that the company would share Chinese citizens' data with foreign governments given its U.S. listing.

The fact that two of DiDi’s largest shareholders, SoftBank and Uber, aren't Chinese companies also made the country apprehensive.

XPEV stock is falling due to concerns that the company could be targeted by Chinese authorities. However, the risk of China targeting EV companies is very remote. China sees the EV industry as a key strategic industry under its “Make in China 2025” plans.

Analysts have a bullish forecast for XPEV stock and its median target price of $49.78 implies an upside of 41 percent over the next 12 months. The stock has received 14 buys and two hold ratings from the analysts polled by CNN Business. That said, these ratings were issued before China’s crackdown.

The valuation framework for Chinese stocks has deteriorated amid the crackdown. Even Cathie Wood, who sold some of the Chinese stocks admitted to the fact. While China might not target XPEV, the company could face greater scrutiny in the U.S. since an arm of the Chinese government has invested in the company.

There's a widespread element of fear among investors when it comes to Chinese stocks. One school of thought would be to follow Warren Buffett’s timeless advice of being greedy when others are fearful. However, even Buffett sold airline companies in 2020 when they were crashing.

While Buffett might not have been fearful then, he did admit to the change in the business outlook for airline companies. Coming back to Xpeng stock, there's a question that investors need to ask. Does China’s crackdown change anything fundamentally for the company?

The answer is tough. As for the core business, it doesn't really change much and EV sales in China should continue to swell. However, the crackdown does change the risk perception about Chinese stocks and they should see an across-the-board deterioration in trading multiples.

The sell-off in XPEV stock looks overdone. If you are willing to take the risk of investing in Chinese stocks despite the ongoing pessimism towards them, XPEV looks like a good bet.