Deutsche Bank Recommends Buying Tesla and LI Stocks on the Dip

Electric vehicles (EVs) have a history that stretches back over a century. Back then, battery-powered cars were already giving gas guzzlers a run for their money. But it’s the advancements in tech happening right now that are really making EVs shine. Today’s batteries are more powerful, longer lasting, and falling in price; new electric motors have become smaller and more efficient for the horsepower generated; and new light-weight body and chassis materials can help compensate for battery weight.

Add to this the combination of social and political will to push EVs, through social promotion and government subsidies, and there’s reason to believe the Rocky Mountain Institute’s estimate that EV sales will make up 62% to 86% of all car sales, globally, by 2030. Noteworthy is Cox Automotive’s observation that EVs captured 7.6% of the U.S. vehicle market share in sales for 2023, a notable uptick from 5.9% in 2022, reflecting a substantial 28.8% surge in market penetration.

In the meantime, EV stocks have been declining recently. Macroeconomic headwinds, in the form of widespread price inflation in both raw materials and end products, high interest rates, and recession fears have put strong downward pressures on EV stock prices – even as more drivers are switching to EVs, or adding an EV as a second vehicle.

However, amidst these fluctuations lies an opportunity for investors ready to embrace some risk. The automotive sector experts at Deutsche Bank have taken up this theme, and they recommend that investors buy into two big EV names now, namely Tesla (NASDAQ:TSLA) and Li Auto (NASDAQ:LI), while the price is right. Let’s take a closer look.

Tesla

First up is Tesla, the somewhat controversial automaker put together by the equally controversial figure, Elon Musk. Musk’s company is the first large-scale automaker in decades to rise from concept to global production and sales by relying on its own resources, and today Tesla holds the crown as the world’s largest automotive company. Tesla boasts a market cap of nearly $590 billion, surpassing that of Ford, Honda, and Toyota combined.

Not only is Tesla the world’s largest automaker, it is also the world’s largest pure-play electric vehicle maker, and one of the few EV companies that is turning a consistent profit. In its 4Q23 and full-year 2023 financial results, released last month, the company reported over $25 billion in quarterly revenue, up 3% year-over-year, though it missed the forecast by $590 million. Tesla reported a non-GAAP EPS of 71 cents per share, down 40% from the prior year and 3 cents below the forecast.

These results reflect several factors that investors need to consider. First, Tesla has been cutting prices on its vehicles recently, across all models. While it is tempting to hope that this reflects efficiencies in production, Musk himself admitted last May that the company sets pricing based on demand – so recent price cuts may indicate softer demand for the vehicles than had been planned.

At the same time, the company is increasing both production and deliveries. Tesla’s production and delivery numbers in Q4 showed this. The company reported 495,000 vehicles built in the quarter, with 484,000 delivered; for the full year, those numbers were 1.85 million and 1.81 million, respectively. The 2023 production numbers were up 35% year-over-year; deliveries were up 38%.

In addition, Tesla is actively working on its ‘next-gen’ platform, the technology and chassis behind the future of electric vehicles. According to Musk, the next-gen vehicle will feature more efficient production, lower costs, and compact SUV styling, and it should enter production for delivery late next year.

What this means for investors, right now, is a degree of uncertainty. As noted, Tesla is valued at more than a half-trillion dollars, making it easily the auto industry’s largest company – but at the same time, its stock is down more than 37% from the peak it reached in July of last year.

Turning to the Deutsche Bank view, we find analyst Emmanuel Rosner acknowledging the near-term headwinds – but charting a long-term course toward further success: “In the near term, we believe worries over 2024 earnings, volume and pricing, could continue to pressure the stock, especially considering the meaningful downside risk we see to next year’s earnings as well. Longer term, however, we believe much of the stock trajectory will be tied to the highly anticipated next-gen platform. As Tesla executes on efficiency initiatives in the next gen platform, the company could deepen its competitive moat and maintain its lead in the electrification space for years to come.”

In Rosner’s view this adds up to a Buy rating, and his $250 price target implies a one-year upside potential of ~34% for this stock. (To watch Rosner’s track record, click here)

That’s the bullish view – but Wall Street, in general, is not so sure of it. The stock has a Hold consensus rating, based on 34 recent analyst reviews that include 12 Buys, 16 Holds, and 6 Sells. The shares are trading for $186.85, and their average price target of $218.57 suggests a gain of 17% lying in wait on the one-year horizon. (See Tesla stock forecast)

Li Auto

Next up is a major player on the Chinese electric vehicle scene. This is an important avenue for EV investors to watch, as China is the world’s largest car market. In 2022, there were 26.9 million new car sales in the Asian giant, with 23.6 million of those being passenger vehicles. Last year, 2023, saw total sales of 30.09 million. In another important point, China is also the world’s largest market for EVs. Mordor Intelligence estimates China’s EV market at more than $305 billion right now and predicts it will grow to $674 billion in just 5 years, for a CAGR of 17.15%.

That’s a rich field of opportunity for an EV company to exploit. Li Auto is managing just that by offering customers cars they like, featuring the latest in EV powertrain technologies, and backing them up with a sound network of dealers and service facilities.

The company’s vehicle models include three consumer-oriented SUVs, the Li7, Li8, and Li9. Li has developed this line of vehicles over several years, having put its first consumer vehicle on the market in 2019. The company has refined its designs and capabilities to meet customer demand and plans to launch its newest model, the Li MEGA, on the first of next month.

The service network behind these vehicles is extensive. Li sells its cars through 467 retail stores located in 140 cities around China and provides service for repair and maintenance through a network of 360 facilities, both service centers and body/paint shops, with locations in 209 cities.

That Li has been successful is clear from its latest delivery numbers. In January of this year, the company made 31,165 deliveries, for an impressive 105.8% year-over-year increase. Cumulatively, Li has delivered 664,529 vehicles as of the end of January this year.

Li will release its numbers for the fourth quarter and full-year 2023 later this month, but for now, we can look back at the Q3 numbers to get an idea of where the company’s top and bottom lines stand. Li beat expectations on both metrics in 3Q23, with $4.75 billion in quarterly sales and a profit of 45 cents per share in non-GAAP measures. The revenue came in $170 million over the forecast, while the EPS was 12 cents better.

Despite these successes, Li’s shares are down in recent months. The stock peaked last August at more than $46 per share but has fallen 34% since then.

For Deutsche Bank analyst Edison Yu, this creates an opening for investors to buy in on a sound stock at a discounted price. He writes of LI, “Following the stock’s… decline since late November, we upgrade Li Auto from Hold to Buy, seeing a compelling set-up in the coming quarters driven by a robust product pipeline, further supported by an attractive valuation for a top tier EV player. The management team has proven time and time again to be best-in-class, being the first OEM to embrace EREV powertrain technology and one of the few upstarts to achieve/beat ambitious targets on volume and costs.”

Yu’s new Buy rating comes with a $41 price target, indicating his confidence in a 36% upside for LI shares. (To watch Yu’s track record, click here)

Overall, Li Auto boasts a unanimous Strong Buy consensus rating from the Street’s analysts, based on 7 positive reviews set in recent weeks. The shares are priced at $30.16, with an average target price of $53.15 to suggest a strong one-year upside potential of 76%. (See Li Auto’s stock forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.