This underwater China EV stock is primed for a 'significant rally,' according to options trader

Published Wed, Jan 24 202410:29 AM EST

With the Chinese equity markets lagging further behind, China has now launched fiscal and monetary policy to stabilize it. As Chinese equity valuations tumble and the government utilizes multiple fronts to shore up confidence, I'm looking at beaten-down stocks such as EV-maker Xpeng (XPEV) for opportunities. Despite increasing competition in an already crowded industry, XPEV has proven its ability to execute on organic growth and margin expansion during these tough times. This provides an opportunity for a significant bounce in an oversold and undervalued stock. With the stock down over 55% in the past 6 months and 85% from its peak, almost every investor since the 2020 IPO is now underwater. However, this presents an opportunity in my opinion as the selling has signs of exhaustion. These types of chart setups can potentially lead to a significant rally over a short period of time. Additionally, XPEV has formed a series of higher lows since bottoming in Oct 2022 and is trading just against this major trendline support. This provides an opportunity to start adding long exposure with an attractive risk/reward ratio. And when we evaluate the business, XPEV is expected to grow revenues by more than 85% in the next fiscal year, far outpacing its larger rivals. And despite that, it currently trades at under one times EV/Sales, when it's peers trade well above 1.5 times. It's recent launch of the X9 model rounds out a strong pipeline for 2024 and 2025, alongside its recent launch in Europe. With an outlook that is head and shoulders above its competition, XPEV trades at a relative discount and presents significant upside. The trade When we consider the macro environment in China and the significantly oversold and undervalued stock of XPEV, my preference is to add long exposure with a simple call option. I'm looking out to April and buying the $10 Calls for a $1.33 Debit. This risks $133 per contract to participate in unlimited upside with a breakeven of $11.33 by the April expiration. With the price history of XPEV, I expect a strong bounce to target the $17.50 level as an initial upside. DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.