What happened

Shares of Chinese electric car stocks revved higher en masse on Wednesday morning, after investors found hope in a mixed third-quarter earnings report from XPeng (XPEV -1.63%). Heading into Q3, analysts had forecast that XPeng would lose $0.36 (pro forma) per American depositary share (ADS) on sales of just over $1 billion. As it turned out, XPeng lost exactly as much money as it was "supposed" to, while sales fell short at $959.2 million.

Despite the disappointing news from XPeng, shares of rival Chinese automakers Li Auto (LI -0.39%) and Nio (NIO 0.44%) are up 15.3% and 17% as of 9:50 a.m. ET -- and XPeng itself is up 28.1%.

So what

XPeng barely met earnings expectations, and missed on sales, and its stock went up anyway -- a lot. And it's not just XPeng that went up; XPeng pulled Li Auto and Nio stocks higher along with it.

What exactly is going on here? Why are Chinese electric vehicle (EV) stock investors so excited about all of this?

To find out, let's take a look at XPeng's numbers. Sales for the quarter may have missed estimates, but they still grew 19% on only a 15% increase in vehicle deliveries in the quarter. That seems to imply stronger pricing for XPeng's EVs. Gross profit margin in the quarter was only 13.5%, down 90 basis points year over year, but still the strongest profit margin XPeng has posted so far this year. Investors bidding up EV stocks today may therefore be responding to the evidence of stronger pricing, and a strengthening profit margin, at XPeng.    

All that being said, XPeng still did lose money for the quarter, and in fact, its loss when calculated according to generally accepted accounting principles (GAAP) -- $0.39 per ADS -- was even worse than its pro forma loss -- $0.36 per ADS.

Now what

When you get right down to it, therefore, the best you can really call this is a "mixed" quarter for XPeng -- and more of a miss than a beat. But will things get better for XPeng, and what does that imply for the other Chinese EV makers?

Turning to guidance, XPeng says that in its fourth quarter currently underway, EV deliveries are expected to range from 20,000 to 21,000 units. Not only would that be a decline of roughly 50% from Q4 2021 deliveries, but it could miss analyst predictions (for 25,000 units) by as much as 20%. If demand for XPeng's EVs is falling, it's hard to imagine this will translate into continued strong pricing on the cars, and as economies of scale dwindle, I'd expect the profit margin to fall as well. Thus, it appears that XPeng is setting the stage for following its mixed Q3 with a clear-cut "miss" in Q4.

Long story short, although management insists it is working to grow sales faster, and "implement prudent cost control initiatives and improve operational efficiency," the cold, hard truth of the matter is that Q3's results were not good news for XPeng -- and its predictions for Q4 show things are likely to get even worse in Q4. Viewed in this context, and also in the context of a Chinese economy that's continuing to be strangled by restrictive COVID-19 policies (economists are predicting 2022 GDP growth will fall far short of the Chinese government's goal of 5.5% growth), I can only conclude that investors buying into XPeng, Li Auto, and Nio stocks today may be making a big mistake.