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Investing.com -- UBS analysts upgraded XPeng (NYSE:XPEV) to Neutral on Monday, citing growing investor willingness to attribute value to the company’s artificial intelligence (AI) initiatives. 

"After DeepSeek shocked equity markets, we believe investors are now willing to assign some value for AI potential, even remote applications," UBS stated in its latest research note covering the electric vehicle firm.

The bank believes XPeng has differentiated itself from other Chinese EV makers with its focus on software and autonomous driving, dedicating about 50% of its annual R&D budget to intelligence and AI. 

"XPeng launched its first large multimodal model, XGPT, in late 2023, and as of now is the only Chinese EV maker that is working on a humanoid robot," UBS noted. 

While the company's AI strategy is ambitious, UBS acknowledged that "R&D resources spread out across so many projects might be thin." A near-term catalyst could be XPeng’s management emphasizing AI at the next quarterly earnings call.

Despite the AI potential, UBS remains cautious due to XPeng’s vulnerability in the competitive mass-market EV segment. 

"Sales momentum since the launch of the Mona M03 in late 2024 came at the cost of a product portfolio downgrade, which dragged blended ASP from Rmb200k to about Rmb160k currently," UBS highlighted. XPeng also faces pricing pressure from BYD (SZ:002594), whose DiPilot100 autopilot system presents a more affordable alternative.

Valuation remains a key concern, with XPeng trading at 1.4x its projected 2026 sales—twice the levels of Nio (NYSE:NIO) and Li Auto (NASDAQ:LI). UBS raised its price target to $18, attributing "0.7x for the auto business, in line with industry peers, and 0.7x for AI initiatives, in line with Tesla (NASDAQ:TSLA)'s historical average premium for non-EV businesses."

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