Why Li Auto Stock Has Considerable Upside

Li Auto (NASDAQ:LI), the largest of the emerging EV players in China, delivered 51,443 vehicles in October 2024, up 27.3% year-over-year. However, sales were down from 53,709 in September 2024.  Li’s total deliveries year-to-date stand at about 393,255 vehicles, an increase of 38% compared to last year. Li’s performance for the quarter was mixed compared to rivals. Nio delivered 20,976 vehicles in October, showing the strongest year-over-year growth of 30%, although numbers were roughly flat month over month. XPeng delivered 23,917 vehicles, a record for the company, up about 19% compared to last year.  Although Li Auto didn’t break down the key drivers of its growth, it’s quite likely that the Li L6, the most affordable model in the company’s lineup, had a big part to play. The vehicle has gained popularity among younger consumers. The vehicle, which was launched in April, is priced at about RMB 250,000 (about $34,500). Li also lowered prices for several of its models a few months ago and this has also likely helped support sales to an extent. Li indicated that it remained the leader in the premium EV space in China, targeting the RMB 200,000 and above ($28,000) new energy vehicle market, for seven straight months.

Now despite the strong growth. Li Auto stock remains down by about 28% year-to-date. There have been a couple of headwinds for Li Auto. Competition in the Chinese EV market is intense, hurting the company’s average selling prices and margins.  The Chinese EV market is crowded, with over 100 brands competing in the space.  Li is also likely seeing a lower mix of premium EV model sales (such as the Li L7, Li L8, and Li L9) and a higher mix of the low-priced L6 model. Li has seen its average selling prices decline by about 15%  year-over-year to RMB 270,000 during the most recent quarter.

Although Li beat earnings and revenue estimates for Q3 2024, the company’s vehicle margin came in at 20.9% in the third quarter, down 0.3% versus the last year. Li’s guidance for Q4 is also a bit lighter than expected. While Li expected revenues of about $6.35 billion at the mid-point, up about 9% compared with the fourth quarter of 2023, this was below Wall Street estimates of $6.7 billion. Separately, China’s economic growth has been weak due to a downturn in the real estate market and a slow rebound from stringent Covid-19 lockdowns that ended over a year ago. Consumer spending and domestic consumption also remain mixed. However, the government recently announced a stimulus plan, which includes lowering interest rates and fiscal support and this could help consumer spending.

Now, the decrease in LI stock has been far from consistent. Returns for the stock were 11% in 2021, -36% in 2022, and 83% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that LI underperformed the S&P in 2021 and 2022. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LI face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a recovery?

Despite concerns about the economy and weakness in the global EV market, the Chinese EV space is still showing promise. There has been a premiumization trend in the Chinese EV market, with cars costing upward of $30,000 accounting for a growing mix of sales at the expense of lower-end EVs. This could play in Li Auto’s favor, as it competes primarily in the premium end of the electric vehicle market.  The stock trades at about $26 per share, about 1.3x consensus 2024 revenues, which is not expensive considering that revenues are projected to grow by over 17% this year and by about 30% next year per consensus estimates.  In comparison, Tesla trades at about 7x forward revenue, despite the fact the revenues are likely to remain almost flat this year. If Li Auto investors value that stock a bit more generously, at about 2x forward revenues, led by its improving growth and potential improvement in margins, the stock could see a considerable upside. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Li Auto stock compares with its rivals Nio and Xpeng.

[1] Returns as of 11/3/2024
[2] Cumulative total returns since the end of 2016

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