A few years ago, Li Auto (NASDAQ:LI) stock was trading at over 200x forward earnings, reflecting high hopes for the Beijing-based company as China’s main rival to Tesla (NASDAQ:TSLA). However, despite being China’s first profit-making new energy vehicle (NEV) maker, the stock has tumbled on slowing growth. I’m still bullish, noting the company’s strong balance sheet and attractive metrics, but I’m increasingly wary about competition and anecdotal evidence about build quality.
Li Auto’s Changing Fortunes
Li Auto stock had been flying high on entry into 2024, with the company ready to start deliveries of its first all-electric vehicle, the Li Mega. Sadly, the firm had pressed ahead with its initial design for the people-carrier type vehicle — or simply made very few changes to the original design — despite concerns about the car’s appearance.
After the car was released, Li Auto’s CEO, Li Xiang, vowed to fight back against negative comments, which did seem a little unusual. Li Xiang, allegedly referencing the avalanche of criticism directed towards the Mega, said, “For those organized illegal and criminal acts, we are already dealing with them by legal means.”
Perhaps the appearance wasn’t the only concern, but the company reportedly only delivered just over 3,000 of the Mega in March. That’s less than half of what analysts had expected. The company had planned to sell around 8,000 of the premium vehicles every month.
While deliveries of the Mega haven’t lived up to expectations, there’s been a broader dropoff in sales across the EREV (extended-range electric vehicle) range — essentially hybrids. This has concerned investors. Sales peaked at 50,353 vehicles in December before tumbling into the new year. May’s deliveries represented the best performance of the year so far for Li, with 35,020 vehicles delivered to customers.
While I understand that shareholders will be disappointed by the Mega’s performance, I’d suggest the falling share price — from as high as $46 in late February to just $18 — is an overreaction. The Mega might be ugly, but the tech, range, and charging speed are impressive. Likewise, Li Auto has delivered 141,207 vehicles so far this year. That’s up 32.5% year-over-year. I still think that’s pretty strong.
Can Li Auto Still Prosper?
Tesla isn’t the only competition facing Li Auto in China. Xiaomi (OTC:XIACF) and Huawei have both entered the market with vehicles packed with smart features. Moreover, NIO (NYSE:NIO) has been making a comeback, and there are dozens of new companies entering the sector, many of which have been drawn in by enticing government policy.
But can Li Auto still prosper? Well, with sales up 32.5% so far this year and being one of the only Tesla competitors that’s already profit-making, I’d argue that it already is. Looking forward, analysts suggest that the company’s earnings per share (EPS) will improve by 10.6% annually over the next three to five years. Personally, I’d suggest that’s conservative, but it’s still strong growth from a stock priced at 16x forward earnings.
Li is also some distance ahead of its new peers, like Xiaomi, with multiple vehicles on sale, providing customers with real choice. On April 18, Li expanded its range further with the modestly priced L6. Starting around $41,000, the large family SUV adds to Li’s range, which starts at around $28,000 and extends to $83,000.
Moreover, the company currently has $2.1 billion of debt and cash reserves of around $13.6 billion. Given the strong cash position, we’re actually looking at a forward EV-to-EBITDA ratio of just 6.6x. For context, Tesla has a forward EV-to-EBITDA ratio of 37.9x, although I understand that this isn’t the perfect comparison, given Tesla’s prospects in automation.
However, albeit anecdotal evidence, a Russian blogging channel I’ve been following for some time recently attempted to put the Li L9 through its paces, and it didn’t perform well. This may be an exception, but it’s one of the first non-Chinese reviews I’ve seen for the car. Hopefully, it’s just a one-off.
Is Li Auto Stock a Buy, According to Analysts?
On TipRanks, LI comes in as a Strong Buy based on 11 Buys, two Holds, and no Sell ratings assigned by analysts in the past three months. The average Li Auto stock price target is $35.05, implying 96.1% upside potential.
The Bottom Line on Li Auto Stock
I must confess that my faith in the stock has been tested in recent months, but I believe Li Auto is a strong business at a good price. Debt levels are low, and the company has plenty of cash to fund new R&D projects. It’s also profit-making, which is more than we can say for many of Li’s peers.
It’s disappointing that the Mega has performed so poorly, but I see this tanking share price as a good entry point. Moreover, the average share price target and the stock’s EV-to-EBITDA ratio give me further confidence.
