With Growth Slowing, Is Li Stock Still Good Value At $21?

LI: Li Auto logo
LI
Li Auto

Chinese luxury electric vehicle maker Li Auto stock (NASDAQ:LI), has declined by about 45% year-to-date. This compares to rival Xpeng stock (NYSE:XPEV) which is down by 29% over the same period. Li Auto delivered 35,020 vehicles for the month of May, up 23.8% compared to last year and up 38% compared to the last month. The growth comes as the company’s newly launched model, the L6, sees strong demand. However, Li’s growth was considerably below rival Nio which shipped 20,544 vehicles for the month, up almost 234% from 6,155 vehicles in the same month last year. In comparison, Xpeng delivered 10,146 vehicles for May, up about 35% year-over-year and close to 8% compared to April.

LI stock has suffered a sharp decline of 35% from levels of $30 in early January 2021 to around $20 now, compared to an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the decrease in LI stock has been inconsistent. Returns for the stock were 11% in 2021, -36% in 2022, and 83% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and TM, and even for the megacap stars GOOG, MSFT, and AAPL.

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 recovery?

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There are concerns about global EV demand, with most mainstream automakers seeing tepid demand and scaling back on their electrification goals. Li’s growth has been slowing, and the company has been looking to cut costs. Gross margins have declined to 20.6% in Q1 2024, down from 23.5% in Q4 2023. The company is looking to lay off about 18% of its total workforce or more than 5,600 people, per a report in the Chinese media outlet 21jingji. That said, there are multiple positives in the Chinese EV market as well. China recently announced new incentives of RMB 10,000 (about $1,410) for consumers to trade their older gasoline cars for electric and low-emission vehicles by year-end. Moreover, Li should also benefit further as it ramps up production of its new low-priced model, the Li L6, which starts at RMB 249,800 ($34,490).  Now, Li stock trades at about $21 per share, about 15x consensus 2024 earnings and 10x 2025 earnings, which is not very expensive considering that the company’s revenues are projected to grow by almost 20% this year and by over 35% next year, per consensus estimates.  See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Nio stock compares with its rivals Li and Xpeng.

 Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 LI Return 1% -45% -29%
 S&P 500 Return 0% 11% 136%
 Trefis Reinforced Value Portfolio 0% 4% 639%

[1] Returns as of 6/4/2024
[2] Cumulative total returns since the end of 2016

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