Shares of the Chinese EV (electric vehicle) company Li Auto (LI) have demonstrated extraordinary volatility in the last month, surging from as low as $19 per share to above $30. However, the stock beta of 0.79 is lower than many of its peers, indicating less volatility. Overall, I’m bullish on this often overlooked NEV (new energy vehicle) company and view it as undervalued, given its strong margins, solid growth prospects, and profitability.
Mixed China Stimulus Weighs on Li Auto and EV Peers
One of the major reasons for Li Auto’s share volatility in the last month was the rollout and subsequent absence of economic stimulus measures from China. The rollout of a mixed economic stimulus from China has weighed upon Li Auto and its peers in the industry.
Li Auto’s shares surged in late September after Beijing unveiled long-awaited economic stimulus measures, including interest rate cuts and reduced bank reserve requirements. The announcement boosted investor confidence, lifting Li Auto’s stock along with other Chinese equities.
On the other hand, the initial optimism, which resulted in a bull run for Chinese stocks, has been tempered by recent developments. The Chinese government’s stimulus plans, announced in early October, were smaller than expected, causing a pause in the rally of Chinese markets. Furthermore, the lack of specific details regarding the size and timing of the stimulus left investors dissatisfied, leading to sell-offs in stocks such as NIO (NIO) and Li Auto. This uncertainty has contributed to Li Auto’s stock with a year-to-date decline of 27%, despite the latest surge in the last 30 days.
Li Auto’s Deliveries Make a Strong Comeback
Li Auto’s deliveries in September made a strong comeback, registering 48.9% year-over-year growth, reaching 53,709 vehicles. These figures represent a remarkable improvement, contrasting sharply with the early part of the year. Meanwhile, September’s deliveries increased slightly from 48,122 units delivered in August.
In the third quarter, the company delivered 152,831 vehicles, marking a growth of 45.4% from the previous year. Li Auto’s recent achievements are particularly remarkable considering its sluggish start to 2024, with deliveries significantly trailing those at the end of 2023. For example, in February 2024, the company delivered just 20,251 vehicles, a drop from 31,165 in January.
Despite the company’s impressive sales figures in September, the share performance was largely overshadowed by wider economic concerns.
Warren Buffett Tells Us to Invest in Quality
As many of you know, renowned investor Warren Buffett emphasizes the importance of investing in quality stocks—companies with strong competitive advantages, robust business models, and impressive profit margins.
I recognize that Li Auto may not meet all of those criteria—and it isn’t an American company. Nonetheless, I firmly believe that Li is among the top-quality companies in the NEV sector. The Beijing-based company boasts the strongest gross margins in the Chinese market, and, unlike many of its peers, it’s profit-making. For context, Li Auto achieved a vehicle margin of 18.7% in Q2 2024, significantly outpacing both NIO and XPeng (XPEV). XPeng’s vehicle margin was reported at 6.4% in the second quarter, while NIO’s was at 12.2% in the same period.
Although it may not be accurate to claim that Li Auto has a definitive moat, its emphasis on extended-range electric vehicles (EREVs) distinguishes it from numerous competitors. With range anxiety remaining a concern for many consumers in China and globally, Li Auto’s offerings provide a viable solution. For example, the Li L9 boasts an impressive range of 877 miles based on tests conducted in China.
Is Li Auto Stock Still Good Value?
Li Auto stock is no longer as clearly undervalued as it once was. The stock is currently valued at 22.2 times forward earnings, representing a 27.7% premium over the consumer discretionary sector. However, NEV sector stocks typically carry higher valuations. Notably, Li Auto trades in line with BYD (BYDDF) but at a significant discount compared to Tesla (TSLA). Nevertheless, since Li Auto’s peers are not generating profits, there are few meaningful comparisons to be made using the price-to-earnings (P/E) ratio.
Moving ahead, the forward P/E ratio is projected to decline to 15x in 2025 and 11x in 2026, indicating improved earnings. It is crucial to note that 2024 is expected to be a step back from 2023. This can be largely attributed to rising competition, which is causing pricing pressure, as well as unexpectedly low deliveries in Q1.
Is Li Auto Stock a Buy According to Analysts?
On TipRanks, LI stock comes in as a Moderate Buy based on six Buy and four Hold ratings assigned by analysts in the past three months. The average Li Auto stock price target is $29.06, implying an about 15% potential upside.
The Bottom Line on Li Auto Stock
Many Chinese companies are experiencing greater volatility compared to their U.S. or European counterparts due to the significant role of state support in the economy. This situation presents both challenges and opportunities for investors.
In conclusion, I believe Li Auto is one of the few companies in this sector that truly reflects quality. It is profit-making, boasts strong margins, and is making significant progress in the EREVs segment, which may offer it a competitive edge.
