Is This "Overlooked" EV Stock Still a Buy After Nearly Doubling in 2023?

When we think of Chinese electric vehicle (EV) stocks, NIO (NIO) has historically been the most popular among U.S. investors, and almost invariably has the highest average traded volumes. Xpeng Motors (XPEV) has gained good traction recently amid its stellar rally in July. Li Auto (LI), meanwhile, was often overlooked - but has gained prominence gradually, and has now caught the market’s attention with both its price action as well as its financial and operating performance.

While both NIO and Xpeng Motors trade significantly below their all-time highs, Li Auto recently hit a new record high. It is among the rare EV stocks that hit a new record peak in 2023, as even Tesla (TSLA) – which is often the bellwether of the EV industry – hasn’t been able to reclaim its 2021 highs, despite almost doubling in 2023.

Li Auto’s strong price upwards price action – including the 98% rally in 2023 alone - hasn’t been without reason. 

Li Auto’s Deliveries Surpass Both NIO and Xpeng Motors

Li Auto delivered over 30,000 cars in both June and July, which took its deliveries in the first seven months of 2023 to over 173,00 units – which, for perspective, is 36% higher than what NIO and Xpeng Motors together delivered over the period.

Until last year, Li Auto’s cumulative deliveries trailed both NIO and Xpeng Motors - but its cumulative deliveries surpassed 400,000 in July, while that metric stood at 364,579 and 303,521, respectively, for NIO and Xpeng Motors.

Also, Li Auto forecast deliveries between 100,000-103,000 in the third quarter, and expects to hit a milestone of delivering 40,000 cars in a month by the end of the year. 

Li Auto Impresses with Its Financial Performance 

Li Auto’s financial performance has been equally impressive. In Q2 2023, the company posted net income of $319 million with gross margins of 21.8%. Tesla – which boasts of industry-leading margins – reported a gross margin of 18.2% in Q2, much lower than the 25% it posted in the corresponding quarter last year.

While Li Auto's financials look good on a standalone basis, they appear even more astonishing when compared to other startup EV companies, which are either posting negative gross margins or low single-digit margins.

The most impressive is perhaps the $1.33 billion in free cash flows that Li Auto posted in Q2. At a time when almost all the startup EV companies are struggling with perennial cash burn, Li Auto’s financial performance stands out - it had liquidity of over $10 billion at the end of June, which looks quite healthy, given its cash requirements.

LI Focuses on Hybrid Vehicles

While Tesla and most other EV names - like Rivian (RIVN)  and Lucid Motors (LCID) - sell only battery electric vehicles (BEVs), Li Auto focuses on plug-in hybrid vehicles (PHEVs). Chinese EV maker BYD (BYDDY) also produces both hybrids and BEVs, and is now the world’s largest seller of new energy vehicles (NEVs) – a category that includes both BEVs and PHEVs.

Incidentally, during its Q2 2023 earnings call, Ford (F) CEO Jim Farley said the company would add hybrid versions across its ICE models, with the aim of quadrupling sales over the next five years – even as it scaled back its ambitious EV production targets.

Is Li Auto Stock a Good Buy?

While LI has already outperformed, I believe it has room to run higher in the long term for the following reasons:

• China views its EV industry as a futuristic and strategic segment of its economy, and has extended the EV tax break until 2027 - which should help to increase EV adoption in the country.
• Li Auto is launching new models, including the Li MEGA  – a BEV model – which, coupled with expansion into new geographies, should drive the company’s growth.
• It has a strong balance sheet to help support its growth in the short to medium term. In fact, a strong balance sheet has become of utmost importance for EV companies amid the worsening price war.
• Li Auto’s track record on execution is much better than most of its EV peers.

Finally, from a valuation perspective, Li Auto trades at a next-12-month (NTM) price-to-sales multiple of 1.67x, and an NTM price-to-earnings multiple of 31.46x – which compares favorably with Tesla’s comparable multiples of 6.91x and 62.8x, respectively.

While Tesla will likely always command a premium, due to its advanced self-driving system and the structural valuation deterioration in Chinese stocks, I still believe Li Auto’s valuation multiples look reasonable.

Li Auto Stock Forecast Looks Positive

Wall Street analysts rate Li Auto's stock as a Strong Buy:

Of the only 4 analysts covering Li Auto stock, 3 rate it as a Strong Buy while 1 rates it as a Buy. Its mean target price is $43.45, while the Street-high target price is $53 - which is a premium of 31% to current levels.  While markets have “discovered” the Li Auto story - as evidenced by its price action - it still remains “overlooked” by Wall Street analysts, considering the fact that it is grossly undercovered.

Analysts are taking note, though, and earlier this month, Bernstein analyst Eunice Lee raised Li Auto’s target price from $38 to $40. In a note to clients, Lee said, “Li Auto remains our top long-term pick on higher confidence in its earnings growth prospect and management execution ability.” She added that LI deserves a premium over peers due to its strong track record, and is also optimistic the company will further increase its market share.

All things considered, after the stellar July rally, the momentum in EV stocks is fading, and they are looking weak in the short term - which, in my view, could be an opportunity to buy names like Li Auto for the long term.