Chinese electric vehicle manufacturer Li Auto (NASDAQ:LI) finally benefited from some positive developments. Earlier Tuesday, Deutsche Bank analyst Edison Yu upgraded LI stock to “buy” from “hold,” although he trimmed his price target by $4 to $41. Nevertheless, the share price forecast still reflects a more than 46% lift from Monday’s closing price of $28.
Fundamentally, the most important element tied to the upgrade centers on the confidence boost. As CNBC pointed out, LI stock has declined approximately 28% since late November. Glaringly, this print was worse than that of the KraneShares CSI China Internet ETF (NYSEARCA:KWEB), which holds many of China’s top publicly traded enterprises. In August, shares traded briefly above $46.
Still, the opportunity in LI stock is that the underperformance comes despite the underlying company having a “best-in-class” management team. Further, Yu pointed out that the company has a track record of beating ambitious targets for volume and cost.
Of course, no investment is perfect, and the Deutsche Bank analyst pointed out that Li’s first quarter may show some weakness. Still, Yu believes that new models and improvements to existing vehicles should help lift volume and margins in Q2. Although not confirmed yet, according to TipRanks, Li may issue its Q1 earnings report on Feb. 23.
LI Stock Rises Amid a Complex Narrative for Chinese EVs
Yu stated that there’s “a compelling set-up in the coming quarters driven by a robust product pipeline, further supported by an attractive valuation for a top-tier EV player.” It’s not an unreasonable expectation for LI stock. According to investment data aggregator Gurufocus, LI trades at about 36X trailing-year earnings. While higher than the auto industry’s median multiple of 15.75X, that also includes legacy automakers.
When stacked against other profitable EV companies, such as Tesla (NASDAQ:TSLA), which runs a multiple of 42.3X, LI stock looks comparatively attractive. Still, many worries remain. In particular, competition from Tesla and compatriot BYD (OTCMKTS:BYDDF) may impose hardships on Li and other EV hopefuls.
Despite some impressive industry numbers, Chinese EV stocks sold off sharply. In large part, this red ink stemmed from individual players losing pricing power. With the Warren Buffett-backed BYD delivering more than 1.5 million fully electric cars last year — most of which targeted its domestic market — the massive volume cut into overall pricing.
Moreover, investors have grown wary of China-exposed companies due to the state of its consumer economy, per CNBC. Indeed, the issue doesn’t just center on EVs. Earlier in the month, shares of consumer technology giant Apple (NASDAQ:AAPL) fell because of concerns associated with high exposure to Chinese consumers.
Taken together, the sentiment in the options market appears negative. For example, last month, Fintel’s options flow screener showed a heavy volume of bought puts and sold calls. Assuming that these transactions are not part of complex multi-tiered trades, they natively represent pessimistic sentiment.
Why It Matters
Despite the moving parts, LI stock has enjoyed a unanimous strong buy rating among six analysts within the past three months. Interestingly, Yu’s $41 target sits very much on the conservative side. In contrast, Morgan Stanley sees shares hitting $63, implying a 108% increase.
On the date of publication, Josh Enomoto 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.
