Li Auto Stock Has Outperformed. Is It Still A Buy?

LI: Li Auto logo
LI
Li Auto

Li Auto stock (NASDAQ:LI) has fared well this year, rising by about 21% year-to-date.  This compares to rivals such as Nio and Xpeng which have returned about -4% and 1%, respectively. So what’s driving the rally in the stock? Li Auto’s Q4 2022 results were reasonably strong, with sales rising by about 66% versus last year to $2.56 billion, and with deliveries jumping to 46,319 units, up from 26,154 units. Li’s profitability is also holding up despite the supply chain constraints that have hurt the broader industry. Gross margins stood at 20.0% –  a slight decline versus last year, compared to rival Nio which saw margins drop to just 6.8%. Moreover, guidance for Q1 2023 was also more robust than anticipated, with Li Auto expecting to deliver between 52,000 and 55,000 cars, marking a 64% to 73% year-over-year increase.

So is Li Auto stock a buy at current levels of about $25 per share? We think so. The overall outlook for the company looks relatively bright. With China easing its zero-Covid policy after over two years of stringent lockdowns, automotive sales, and consumer spending, should pick up. China’s Purchasing managers index – an indicator of manufacturing activity – hit an 11-year high in February. Moreover, overall EV demand and favorable regulation in China remain a tailwind for Chinese EV players. Although national-level subsidies are receding, provinces are looking to make EV purchases more attractive. Over 2022, deliveries of new energy vehicles – a broad term that includes hybrids, EVs, and fuel cell vehicles – rose by over 2x versus last year. This could help Li Auto, which has highly differentiated vehicles that have a small gasoline engine that generates additional electric power and extends range. The company has also been expanding its product line beyond its mainstay Li ONE model which was first introduced in 2019. The company’s product lineup now also includes the Li L9, a six-seat SUV, the Li L8 family SUVs, and the recently launched Li L7, which is a five-seat flagship SUV. Li’s valuation is also reasonable, with the stock trading at about 1.8x forward revenues, which is well below the likes of Tesla (which trades at about 6x forward revenue).

Check out our analysis on Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for more details on how Li Auto stock stacks up versus its peers Nio and Xpeng.

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Returns Mar 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 LI Return 5% 21% -14%
 S&P 500 Return 0% 3% 77%
 Trefis Multi-Strategy Portfolio -3% 4% 228%

[1] Month-to-date and year-to-date as of 3/29/2023
[2] Cumulative total returns since the end of 2016

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