Electric vehicle stocks have been in a correction mode in the last few quarters. The correction has been aggravated by challenges that include chip shortages, broader supply chain issues, and raw material cost inflation.
One stock that has remained relatively resilient is Li Auto (LI). Over the last 12-month period, LI stock has risen higher by 5%. In comparison, Chinese electric vehicle companies like Nio (NIO) and XPeng (XPEV) have declined by 53% and 31% respectively.
I am bullish on Li Auto and I believe that the stock is likely to remain an outperformer. Once near-term challenges are navigated for the industry, there could be ample scope for upside.
It’s worth mentioning at the onset that Chinese electric vehicle companies are likely to benefit from favorable regulations.
Recently, the finance ministry announced that China will cut taxes levied on low-emission vehicles. The government is also in talks with automakers for potential extension of EV subsidies. It might therefore be a good time to invest in Chinese EV stocks.
On TipRanks, LI scores a 10 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.
Strong Growth for Li Auto
A key reason for LI stock outperforming is the company’s healthy growth even amidst near-term challenges.
For Q1 2022, the company reported vehicle deliveries of 31,716. On a year-over-year basis, deliveries surged by 152.1%. With 217 retail stores, the company has already expanded its footprint to 102 cities.
Besides the delivery growth factor, there are two more reasons to like Li Auto from a financial perspective.
First and foremost, the company reported operating and free cash flow of $289.3 million and $79.2 million respectively. Considering the growth momentum in deliveries, Li Auto might be positioned for annualized operation cash flow of around $1.5 billion. If cash flows continue to swell, the company’s investment in expansion and product development can largely be funded internally.
Further, Li Auto reported vehicle margin of 22.4% for Q1 2022. The company’s vehicle margin is superior as compared to Nio and XPeng. It’s also worth mentioning here that the company reported cash and equivalents of $8.07 billion as of March 2022. The company has ample financial flexibility to invest in aggressive expansion.
New Models to Boost Growth Further
Li commenced mass-delivery of its first model, LI ONE, in November 2019. The model is a six-seat large premium SUV. In May 2021, the company released the upgraded model of LI ONE. Therefore, deliveries growth has entirely been driven by one model in the last 30-months.
Even with the recent headwinds for the industry, the company plans to commence deliveries of L9 in the third quarter of 2022. The new EV is likely to have a range of 1,315km, or about 817 miles on a single charge.
With the luxury vehicle, margins are likely to remain robust. Importantly, the new model launch will ensure that vehicle deliveries remain strong through 2023.
In August 2021, it was reported that Li Auto is considering a production site in Europe. Chinese electric vehicle companies like Nio and XPeng have already entered the European markets.
With the region looking to reduce energy dependence on Russia, the EV market is likely to gain further traction. It would not be surprising if Li Auto announced entry into Europe in 2022 or 2023. International expansion is another factor that’s likely to support deliveries growth.
It’s worth noting that the company’s L9 model will be equipped with an autonomous driving system. Additionally, the model will be equipped with all-scenario navigation. The key point is that Li Auto is focused on innovation and luxury, and that these factors can potentially help in gaining international market share.
Wall Street’s Take
Turning to Wall Street, Li Auto has a Strong Buy consensus rating based on six Buy rating assigned in the past three months. The average Li Auto price target of $38.33 implies 27.9% upside potential.
Concluding Views
Li Auto has been aggressively expanding presence in China with a sole model driving growth. It also seems that the company has ambitious international expansion plans, with the idea to build a plant in Europe underscoring this view.
The company also has an edge over its peers from a financial perspective. A robust cash buffer and strong operating cash flows will enable the company to make big investments.
Supply chain issues for the electric vehicle industry are likely to ease in the next 6-12 months. With a new model launch in the pipeline, Li Auto seems to be positioned for robust growth.
It’s worth noting that LI stock has surged by almost 50% in the last month. Small corrections can be used to accumulate on the stock with a medium to long-term investment strategy.
Read full Disclosure
