After doubling between mid-May and early July, Li Auto (NASDAQ:LI) stock has pulled back in recent weeks. But not due to any dramatic changes in the electric vehicle company’s fundamentals or prospects. As seen from its June delivery numbers, the growth story behind this name remains intact. That’s why the dip in LI stock is a China EV opportunity.
On a sequential (month-over-month) basis, Li’s sales grew a staggering 78%, well above the numbers seen with Nio (NYSE:NIO), which saw 20% sequential growth last month. Or with Xpeng (NYSE:XPEV), which saw sequential growth of 15%.
So, what’s been dragging down Li? Just like with its peers, chalk it up to the fallout from the recent issues surrounding Didi Global (NYSE:DIDI). As I discussed in my July 14 article on Nio, investors are concerned about further regulatory actions by China that may hamper China-based companies that trade on U.S. stock exchanges. In that same article, I made the case why Nio was set to trade sideways, as its positives and negatives cancel each other out.
Do I feel the same about this other China EV play? Not exactly. On one hand, the LI share price could struggle in the short-term, given the many factors (more below) that could further weigh down on it. On the other hand, it’s more reasonably priced than its peers. Even as it has similarly strong prospects like its peers. It may not deliver big gains again anytime soon. But it may be the best way to make a long-term bet on the rise of EVs in China.
Growth Numbers Show Why LI Stock Valuation Makes Sense
Trading for 8.9x projected sales for 2021, and 5.2x projected sales for 2022, Li Auto shares are pricey, compared to automotive stocks overall. But unlike its peers Nio and Xpeng, the LI stock valuation looks a lot more reasonable.
Considering its strong June delivery numbers, which give confidence that it’ll hit analyst growth projections, the valuation makes perfect sense. That is, if the sell-side estimates prove out — that sales will grow 112.6% this year, and 74.2% the next, on par with projections for Nio — why not buy this name?
Sure, Xpeng projections call for even greater levels of sales growth in 2021 and 2022 (155.6% and 84.9%, respectively). Yet, with its higher valuation, this larger amount of projected revenue growth is more than accounted for. In the case of Li? Investors may not be pricing in enough of its positives.
As for the negatives? These have been priced in quite a bit. But that’s not to say this will let up in the near-term. In other words, many factors are currently out there that could sink shares further in the coming months.
Despite Strengths, Sell-Off Could Continue
In my view, LI stock looks to be the better Chinese electric vehicle play. However, like the comparable names mentioned above, there are several factors that could weigh it down and help eliminate the rebound it’s seen over the past two months.
First, issues relating to the China EV space. Mostly, the risk of competition. Its market is one of the hottest out there right now when it comes to electric vehicles. And, it’s not just domestic rivals, vying for a larger piece of the pie. As you may know, Tesla (NASDAQ:TSLA) has been in the Chinese market for several years. Incumbent automakers, like Ford (NYSE:F), General Motors (NYSE:GM) and Volkswagen (OTCMKTS:VWAGY), which are fast shifting focus to electrified vehicles, have this market in their sights as well.
Second, there are the issues that could cloud China stocks going forward. Following China’s crackdown on Didi, and possible similar concerning actions ahead, investors may continue to price in more jurisdictional risk into U.S.-listed shares of Chinese companies.
To top it all off, the possibility of interest rate hikes sooner than anticipated, on the heels of higher inflation, could hurt the performance of China EV stocks as well. Put these factors together, along with the lower levels of retail hype surrounding this stock compared to Nio, and LI stock could take a trip back to $20 per share (or lower), before it starts moving back toward its all-time high ($47.70 per share).
Bottom Line: LI Stock Offers Best Play On Rise of EVs in China
There are many factors that could sink this stock in the coming months. Not to mention, the downside risk if its July or August delivery numbers fall short of expectations. However, the risks with this name are the same risks at hand with its pricier peers, Nio and Xpeng.
LI stock is also gaining some interest among a broader basket of stocks tracked by the Bloomberg Electric Vehicles Index and the KraneShares Electric Vehicles & Future Mobility Index ETF (NYSEARCA:KARS), which includes the shares among the top 15 names in its 60-stock portfolio, at 2.62% weighting.
The short-term may be rocky for LI stock. But the long-term? With strong growth prospects, and a reasonable valuation, consider this your better option when it comes to exposure to the China EV megatrend.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, a contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
