As electric vehicles continue to permeate the market, it’s not a single-company game anymore. There are plenty of companies out there that aren’t named Tesla (NASDAQ:TSLA) that are poised to take market share and grow in line with broader sector-wide trends. One such company I’ve had on my radar for some time is Chinese EV maker Li Auto stock (NASDAQ:LI).
Li Auto stock is one of roughly 500 EV companies in China, but consolidation has taken place as the clear leaders become established. Unlike the U.S., China saw significant adoption of electric vehicles, with over one-third of car sales being electric or hybrid in recent years. That number is only likely to grow, given the CCP’s stance on creating a green energy economy moving forward.
Li Auto’s stock price has been volatile, and is up over the past year. However, I think more upside could be on the horizon, and here’s why LI stock remains a buy in my books right now.
Competition Remains Strong
Li Auto has been competing with more prominent brands, specifically Tesla, and has shown great resilience in 2023. However, the company has been struggling lately to maintain a spot in the top EV stocks list.
Recently, Li launched its first all-electric minivan, boasting a 310-mile range and rapid 10-minute charging. To support this expansion, Li plans to establish a network of 10,000 superchargers by 2025, aiming to double production to 800,000 cars this year amidst competition with Tesla.
Li Auto stock impressed its investors with consistent deliveries, but adjusted Q1 2024 guidance due to a sales dip and misaligned strategy with its MPV Li MEGA. CEO Xiang Li emphasized prioritizing user value over competition for sustainable growth.
Li revised its Q1 delivery forecast to 76,000 to 78,000 electric vehicles due to lower order intake, a 26% decrease from initial estimates. Despite potential 44.5% growth from Q1 2023, investors were surprised by the sudden volume reduction. Xiang Li also acknowledged errors in overestimating the market readiness for its high-end MEGA electric car, mistakenly assuming it was in full-scale production.
A Bullish Perspective
Despite strong 2023 results, with 173.5% sales growth and $1.7 billion in profits, Li Auto’s Q1 2024 sales projection of 100,000 to 103,000 EVs fell short of expectations—this slowdown from Q4’s sales of 131,805 units concerned investors about the company’s future performance.
Li Auto’s stock took a hit on March 21, dropping 7.1% after the company adjusted its EV production forecasts, disappointing investors.
That said, there is a strong fundamental case to be made for this stock long-term. The company’s margins are expected to expand over time, as cost-cutting pressures give way to eventual price increases, and costs continue to decline. Bank of America analyst Ming Hsun Lee reaffirmed a “buy” rating and raised the price target to $57, largely on a positive forward outlook.
Lee’s confidence in Li’s potential stems from its impressive Q4 performance: EV sales nearly tripled, revenues rose 136%, and profits doubled. Li generates substantial free cash flow with gross profit margins surpassing significant automakers. Despite an anticipated Q1 sales slowdown, Li’s valuation at 7.3-times free cash flow seems remarkably undervalued given its robust growth.
Best to Avoid LI For Now
Li Auto stock faced multiple downward movements in the past month, dropping below its 20-day moving average, previously a support level. Resistance at $47 halted February and August 2023 rallies, resulting in a 30.2% decline this month. Despite this, all nine analysts rate LI stock a “buy” or better, with a consensus target price of $57.09, suggesting significant upside potential over the next year.
I tend to agree, and take the longer-term view on this innovative and fast-growing Chinese EV stock. I think investors need to look past near-term headwinds and a few years ahead to truly see the picture. But it’s one that’s starting to look a lot more rosy, at least in my view.
On the date of publication, Chris MacDonald 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.
