Following Solid December Deliveries, Is Li Auto Stock Undervalued At $37?

Chinese luxury electric vehicle maker Li Auto stock (NASDAQ:LI) had a solid December, delivering a record 50,353 units for the month, up almost 2.4x compared to last year. The number was also up from the 41,030 vehicles that the company delivered in November. Li is seeing robust demand for its three SUVs, namely the Li L9, Li L7, and Li L8 which all combine gasoline generators with batteries to extend the range of EVs and reduce range anxiety. All three vehicles are relatively premium offerings, priced at above RMB 300,000 ($42,000). Total deliveries of Li Auto vehicles in 2023 reached  376,030, up 182% versus the previous year.  The company appears to be looking at even more aggressive growth for 2024, apparently targeting 800,000 annual deliveries in 2024, per a post by the company’s founder on Weibo. While rivals Nio and Xpeng have yet to publish their delivery figures, it’s safe to assume that Li will be well ahead in terms of total deliveries for the month.

LI stock has witnessed gains of 15% from levels of $30 in early January 2021 to around $35 now, vs. an increase of about 25% for the S&P 500 over this roughly 3-year period. However, the increase in LI stock has been far from consistent. Returns for the stock were 11% in 2021, -36% in 2022, 83% in 2023, and 0% in 2024 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, 24% in 2023, and 0% in 2024 (YTD) – indicating that LI underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could LI face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

There are concerns about global EV demand, with most mainstream automakers, including Volkswagen, Mercedes, Ford, and GM indicating a softer-than-expected uptake. However, demand doesn’t appear to be an issue at the moment in China. Total sales of electric vehicles in China reached 1.026 million units in November. Over the January to November period, total EV sales rose by 36.7% year-over-year to 8.3 million units. Now competition is mounting and this has resulted in considerable price wars. But, Li’s highly differentiated vehicles appear to be giving it an edge in the market. Unlike rivals who have seen margin compression in recent quarters, Li’s margins have been improving. For Q3, Li posted gross margins of 22%, compared with 12.7% in Q3 of 2022. In contrast, Nio posted a gross margin of 8% in Q3, down from 13.3% in the year-ago period. Li trades at about $37 per share, roughly 20% off all-time highs seen recently. In relative terms, the stock presently trades at 2.9x estimated 2023 revenues. Although this is ahead of Chinese rival Nio, it is below the likes of Tesla and Xpeng. Considering Li’s superior growth and recent profitability, this is not an expensive valuation. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Li Auto stock compares with its rivals Nio and Xpeng.

[1] Month-to-date and year-to-date as of 1/1/2024
[2] Cumulative total returns since the end of 2016

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