Li Auto (LI) Stock is Vastly Under Appreciated by Investors

The stock of Chinese vehicle manufacturer Li Auto (LI) has disappointed investors over the past 12 months. Shares in the company slumped following the release of its first electric vehicle, which flopped, and haven’t recovered. However, I remain bullish on this cash rich company, noting the strength of its margins and the expected recovery in earnings following the current downturn.

What I Love About Li Auto

The first reason I’m bullish on Li Auto is its impressive margins and product mix. The company boasts the strongest margins in the industry, with a gross margin of 21.5% in Q3 of this year, outpacing competitors like NIO (NIO) and XPeng (XPEV). This financial strength is underpinned by Li Auto’s strategic focus on extended-range electric vehicles that offer a compelling blend of electric and traditional powertrain benefits, and alleviates the range anxiety associated with most EVs.

The company’s product mix is another reason to admire LI stock. Its line-up, including the flagship Li L9, Li L8, and Li L7, caters to various segments of the premium family SUV market. The success of models like the Li L6, which has achieved over 160,000 cumulative deliveries since its April release, highlights the brand’s resonance with consumers. The strong margins and impressive product mix are complemented by an impressive growth trajectory, with vehicle deliveries increasing by 45% year-over-year in Q3 2024, reaching 152,831 units. This success has boosted its market share in the electric vehicle sector to 17%.

What’s particularly exciting is that Li Auto hasn’t yet begun exporting its vehicles, and this indicates significant potential for future expansion. The company is eyeing global markets, with plans to enter the Middle East in coming years. This untapped international potential, combined with Li Auto’s strong domestic performance, product mix, and innovative technologies, makes it a compelling investment opportunity.

Li Auto’s Valuation

I’m also bullish on Li Auto because its valuation presents an attractive long-term opportunity despite near-term earnings contractions. The company’s current price-to-earnings (P/E) ratio of 17.3 times and forward P/E of 23.7 times may seem high, but these figures don’t reflect Li Auto’s true potential. Firstly, the forward price-to-earnings-to-growth (PEG) ratio of 3.3 is high. However, it’s important to note that this metric is distorted by short-term earnings fluctuations, with the company expecting a contraction of earnings in 2024, and doesn’t account for Li Auto’s substantial cash reserves of $15.2 billion and very limited debt.

Taking cash into account, we can see that Li Auto’s EV-to-sales ratio of 0.5 times is exceptionally low, indicating that the market may be undervaluing the company’s revenue generation potential. Similarly, the EV-to-EBITDA ratio of 9.1 times indicates a 30% discount to the consumer discretionary sector, which is attractive. Moreover, the company’s strong cash position provides a significant buffer for investments and market expansion. Looking forward, analysts project strong revenue growth of 26% annualized from 2024 to 2026, while earnings per share (EPS) will increase from $1.20 in 2024 to $2.18 in 2026.

Near-Term Catalysts

Li Auto has several near-term catalysts that could improve sales and help it maintain its strong market position. Among these, the company recently launched a three-year 0% interest financing incentive for all models, which is available until December 31, 2024. The firm needs to sell almost 60,000 vehicles in the final month of the year to hit targets, and this incentive could well make that happen. This move, in response to Tesla’s (TSLA) discounts, allows customers to save between RMB 15,700 and RMB 27,700 in interest payments.

The company’s growing retail network, now at 479 stores in 145 cities, and its expanding supercharging infrastructure with 1,000 stations across China, also enhance the firm’s competitive edge and creates revenue generation opportunities. These initiatives, combined with Li Auto’s focus on autonomous driving capabilities, position the company for continued growth.

Is Li Auto Stock a Buy?

On TipRanks, Li Auto stock has a Moderate Buy rating based on four Buys, four Holds, and zero Sell recommendations assigned in the past three months. The average LI price target of $30.35 implies 33.73% upside from current levels.

Read more analyst ratings on LI stock

Conclusion

I’m bullish on LI stock despite its recent underperformance. The company’s strong margins, impressive product mix, and growing market share in China’s electric vehicle sector are compelling reasons for optimism. Moreover, I believe Li Auto’s valuation metrics are attractive when accounting for its substantial cash reserves and despite the near-term fall in earnings. Near-term catalysts such as financing incentives and expanding infrastructure could drive revenue growth. And while earnings are expected to contract in the short-term, analysts project a strong revenue and EPS recovery and growth through 2026. For these reasons, Li Auto presents an appealing long-term investment opportunity in the competitive EV market.