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Avoid Nio and Xpeng Before It is Too Late

Few investors are surprised that a price war for vehicles accelerated in China. The government introduced new rules to increase the pace of EV sales. It also discouraged purchases of gas-powered vehicles.

As the Chinese emerged from the lockdown, auto sellers competed for their limited disposable income. In addition, Nio, bracing for more competition from Tesla (TSLA), reportedly refrained from a price war. Conversely, Xpeng (XPEV) is struggling competitively.

Xpeng posted a 37-cent per share loss in Q1. Revenue slumped by 45.9% Y/Y to $587.31 million. It delivered 18,230 units at that time. This is 17.9% lower from 22,204 in Q4/2022.

For Q2, XPeng, expects unit deliveries to fall by 36.1% to 39.0% to 21,000 – 22,000 units. The tougher market conditions will pull Nio’s business lower.

Investors should avoid both Nio and Xpeng stocks. They are value traps with deteriorating fundamentals ahead. It cannot survive on negative gross margins. Unable to scale the business by posting profitability as output increases, Xpeng will need to raise funds. This will dilute shareholders, pressuring them to sell later.

Cautious investors should avoid XPEV stock. China’s economy is not showing signs of a rebound. Its people will limit spending to necessities, shunning big purchases like EVs.