The Chinese EV maker looks undervalued relative to its growth potential.
Li Auto (LI 1.83%), a leading manufacturer of plug-in hybrid electric vehicles (PHEVs) in China, went public at $11.50 per American depositary share (ADS) on July 30, 2020. Its stock more than quadrupled to a record high of $46.65 on Aug. 7, 2023. At the time, it was dazzling the market with its soaring PHEV deliveries and the launch of its first battery-powered electric vehicle (EV).
But today, Li’s stock trades at $27. The bulls retreated as China’s tepid economic growth, the persistent price war in the EV market, and higher tariffs on Chinese EVs weighed down the sector. So is it the right time to buy, sell, or hold Li’s stock?
Li’s MEGA electric minivan. Image source: Li Auto.
How fast is Li Auto growing?
Li started to deliver its first PHEVs at the end of 2019. It discontinued its first vehicle, the Li One SUV, in 2022. It currently sells four plug-in hybrid SUVs (the L6, L7, L8, and L9) and the battery-powered MEGA minivan. From 2020 to 2023, Li’s annual deliveries increased more than 11 times, from 32,624 vehicles in 2020 to 376,030 vehicles in 2023.
|
Metric |
2020 |
2021 |
2022 |
2023 |
1H 2024 |
|---|---|---|---|---|---|
|
Deliveries |
32,624 |
90,491 |
133,246 |
376,030 |
188,981 |
|
Growth (YOY) |
N/A* |
177% |
47% |
182% |
36% |
Data source: Li Auto. YOY = Year-over-year. *Started deliveries in December 2019.
From 2020 to 2023, Li’s revenue grew at a compound annual growth rate (CAGR) of 136%. It also turned profitable in 2023 with a net margin of 9.5%. That profitability sets Li apart from its unprofitable competitors like Nio.
Like Tesla (NASDAQ: TSLA), Li has been building its own network of superchargers to support its own vehicles. At the end of the second quarter of 2024, it was operating 614 supercharging stations equipped with 2,726 charging stalls across China. It also operated 497 retail stores across 148 cities and 421 service centers in 220 cities.
The reasons to buy and hold Li Auto’s stock
The bulls love Li because its growth rates are impressive and its valuations are attractive. From 2023 to 2026, analysts expect its revenue to grow at a CAGR of 24% as its net income increases at a CAGR of 15%. Its business is maturing, but it could still have plenty of upside potential as it launches new EVs, grows its supercharging network, and expands overseas.
Based on those expectations and its enterprise value of 115.7 billion yuan ($16.25 billion), Li trades at just 0.8 times this year’s sales. In comparison, Nio trades at 1.1 times this year’s sales, while Tesla trades at 8.4 times this year’s sales.
Li trades at such a low valuation because China’s sluggish economic growth and trade conflicts with the U.S. are still driving many investors away from Chinese equities. However, China has been launching new stimulus plans to stabilize the economy and boost consumer spending — and those initiatives could make Chinese stocks a lot more attractive again.
The reasons to sell or avoid Li Auto’s stock
The bears aren’t as optimistic about Li Auto’s future because its margins are under pressure and its overseas expansion faces significant challenges. Li’s vehicle margin had expanded from 16.4% in 2020 to 21.5% in 2023, but that figure shrank year over year to 19.3% and 18.7% in the first and second quarters of 2024, respectively.
During Li Auto’s latest conference call, CFO Johnny Tie Li attributed that decline to a “different product mix and pricing strategy changes” — which implies it’s selling a higher mix of lower-margin vehicles and cutting its prices to keep pace with its competitors. Analysts expect its net income to decline 38% this year before rising again in 2025.
Li’s long-term growth also depends on its overseas expansion. Last year, it said it would launch its first vehicles in the Middle East in late 2024 and 2025. However, it’s now pushing back that timeline to focus on its domestic growth. Li had also been interested in entering the U.S. market, but the escalating trade tensions and high tariffs on Chinese-made EVs are forcing it to postpone those plans. If Li can’t expand beyond China, analysts might need to rein in their rosy long-term forecasts.
Is it the right time to buy, hold, or sell Li’s stock?
Li faces some near-term challenges, but it’s smarter to buy and hold its stock than to sell it. It’s growing rapidly, economies of scale are finally boosting its profits, and it still looks dirt cheap relative to its long-term growth potential.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
