Why Li Auto’s Growth Is Slowing Down

Li Auto (NASDAQ:LI), the largest of the emerging EV players in China, delivered 48,740 vehicles in November. While the number was up by 19% compared to last year, it marks a decrease of 5% from October.  Li’s total deliveries year-to-date stand at about 441,995 units, up 36% compared to last year. Li’s growth was also behind both of its principal rivals. Nio stock (NYSE:NIO) reported deliveries of 15,493 vehicles for November, marking an increase of about 29% compared to last year, while Xpeng (NYSE:XPEV) sold 30,895 vehicles, up 54% year-over-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 helped volumes. The vehicle, which was launched in April, is priced at about RMB 250,000 (about $34,500). Separately, Li has also been making advancements to its autonomous driving system Li AD Max and this is also helping drive vehicle sales higher. The company is also resorting to promotions, amid rising competition, lowering prices for several of its models a few months ago, while also announcing a new promotion toward the end of November offering customers a three-year, zero percent interest financing incentive on their purchase of any Li Auto vehicle through the end of this year.

Li Auto’s stock has also been a mixed performer. While the stock remains down by 37% year-to-date, returns stood at 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.  So what’s next for Li Auto stock?

Li stock trades at about $24 per share, about 1.2x 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, EV bellwether Tesla trades at about 11x forward revenue, despite the fact the revenues are likely to remain almost flat this year. Tesla stock has gained over 40% since the election of Donald Trump, but investors might be getting ahead of themselves. Tesla Stock And Trump: Risks Galore

Now, Li Auto is facing a couple of headwinds. Intense competition in the Chinese EV market is pressuring its average selling prices and margins, with over 100 brands vying for market share. The company is also experiencing a shift in its sales mix, with fewer premium models (Li L7, Li L8, and Li L9) and more sales of the lower-priced L6, contributing to a 15% year-over-year decline in average selling prices to RMB 270,000 (about $37,000) last quarter.

Additionally, Li’s first purely electric model, the MEGA van, which comes without the gasoline range extender found in Li’s other vehicles, hasn’t quite lived up to expectations. Priced upwards of $70,000, the vehicle is aimed at the high-end EV market and wasn’t expected to be a major volume driver, its weak performance has likely been a concern for investors. The company has relied heavily on the advantage of its gasoline-powered range extenders to sell its vehicles in recent years, but as charging infrastructure continues to improve, that edge could start to fade, and delivering popular pure EVs will be crucial.  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 12/2/2024
[2] Cumulative total returns since the end of 2016

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