Innovation and Risk Taking Will Continue to Push Li Auto Stock Higher

The Chinese electric vehicle space is booming. It’s the biggest EV market in the world, accounting for over 50% off global deliveries. A big factor in driving sales higher is the Chinese government, which hopes new energy vehicle (NEV) sales can reach around a quarter of all car sales in 2025, up from 5% at present. Thus far, Tesla (NASDAQ:TSLA) and Nio (NYSE:NIO) have dominated headlines, but Li Auto (NASDAQ:LI) stock seems ready to steal some thunder.

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Beijing-based Li Auto has manufacturing facilities in Changzhou, a prefecture-level city in southern Jiangsu province, China. It develops, manufactures, and markets EVs with a small gasoline engine, essentially a hybrid machine.

By all accounts, Li ONE, the company’s only model on sale, is very popular. In October, the company delivered 3,692 units, the third consecutive month of record monthly sales. Li ONE once again overtook NIO and BYD Tang DM to become the No. 1 selling new energy SUV in China for the second consecutive month.

It is also the 10th consecutive month the Li ONE has outpaced NIO ES8, Porsche Cayenne E-Hybrid, and Tesla Model X in the new energy mid-size SUV segment. The SUV has amassed 22,160 insurance registrations from January through October.

Considering the numbers, it’s no surprise that analysts and investors believe we have another Nio on our hands. Except, Nio stock trades at 29.90 times forward enterprise value-to-sales, while Li stock is going for 22.85 times.

Best of Both Worlds

Li ONE is China’s first and only commercially available Extended Range Electric Vehicle (EREV). What that means is the car has an auxiliary power unit (called a range extender), which increases the EREV’s driving range. It can switch between three different driving modes, depending upon driver preference and charging station availability.

At a starting point of $21,000, the Li ONE is relatively cheaper compared to other competitors. The company is targeting families in China, a growing segment of an already vast Chinese middle class. Hence, a battle to become the long-range fully electric vehicle of choice makes sense. However, Li Auto’s design gives it a competitive advantage.

In China, although the EV sector has grown by leaps and bounds, the government still has a lot to do on the infrastructure side. That’s where having a model like the Li ONE in your arsenal can pay dividends. The ability to switch allows drivers to improve their gas efficiency depending on access to charging stations.

Self-Driving Roadmap

Global autonomous vehicle demand is forecasted to reach 4.2 million units by 2030, expanding at a CAGR of 63.1%. But these estimates do not take into account the effect of the virus. That’s because the pandemic will exacerbate the need for self-driving cars exponentially.

Businesses are increasingly aiming for contact-free delivery to mitigate transmission risks. Amidst this backdrop, Li is partnering with NVIDIA to incorporate artificial intelligence in its vehicles. Under the agreement, the company will incorporate the NVIDIA Orin SoC chipset in its full-size extended-range premium smart SUV, set for a 2022 launch.

Considering the future, this is a welcome move. However, there are already several players that are working on autonomous driving. Xpeng (NYSE:XPEV) recently unveiled its next-generation autonomous driving architecture that will feature in its 2021 production models. XPEV stock jumped 34% after the announcement. Notably, the company will incorporate laser-based lidar technology in its software infrastructure.

Xpeng will be the first company to use the technology in mass-market vehicles. Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) uses the technology in its Waymo self-driving cars. However, they remain in the test phase. And you can never count out Tesla. Its Tesla Autopilot platform allows, aside from other things, self-parking, automatic lane changes, and semi-autonomous navigation.

LI Stock Is Attractively Valued

Due to the immense investor interest in EV stocks, almost every company in the space is surging. That makes valuation increasingly difficult. Out of the major Chinese players out there, Li Auto, Nio, and Xpeng, Li stock is the most attractively valued.

Shares are trading at 24.66 times forward price-to-sales versus Nio and Xpeng stock, trading at 30.27 times and 55.34 times, respectively. Tesla is a bit more palatable at 18.08 times, but it doesn’t have the aggressive sales estimates that Li Auto boasts. Li Auto believes it will reach sales of more than $4.3 billion in 2022.

I am not going to defend the numbers here. They are certainly optimistic. Investors are hoping that the low-cost Chinese infrastructure and the central government’s support will help these companies continue to grow in the domestic market before they make their eventual expansion to the rest of the world.

Nio is considered the safest bet in the sector, as it jostles for the Chinese EV crown with Tesla. Just last month, NIO delivered 5,055 vehicles, a new monthly record. It’s a pioneer in the battery as a Service (BaaS) and is also developing self-driving technology.

But with a market cap of $37.95 billion, it may be a tad bit too expensive for your taste. Instead, Li stock looks attractive, considering its growth outlook and relative valuation.

On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Faizan Farooque is a contributing author for and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.

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