Fresh off news that its March 2024 deliveries climbed by 39% year-over-year, Chinese automotive company Li Auto Inc. (NASDAQ:LI) has solidified its position as a leader in the electric vehicle (EV) space. This production momentum could carry forward, as the electric vehicle market is poised for rapid growth, potentially driving significant stock gains. Still, despite a major improvement in deliveries, Li recently lowered its delivery forecast.
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Analysts are looking to Li as one of the emerging leaders in the quickly-growing EV market in China. I echo their optimism, particularly as the stock is currently trading more than a third below its recent high of more than $46 per share in February. Overall, I’m bullish on Li Auto. Still, there are a variety of positive and negative factors to consider before entering a position in LI stock. We’ll take a closer look below.
Profitability Sets Li Apart
One factor distinguishing Li from rivals in the highly competitive EV industry is its profitability. In the last quarter of 2023, the company posted income from operations of nearly $428 million, with an operating margin of 7.3%. Net income for the quarter was over $810 million.
Electric vehicles are notoriously unprofitable for automakers. Both newcomers to the space with a special focus on this type of vehicle, as well as seasoned automotive firms like Ford (NYSE:F), often face losses in the tens of thousands on every single electric car they sell. The high costs associated with batteries and other technology behind EVs may be behind this.
While some rivals—like Ford and even American EV titan Tesla (NASDAQ:TSLA)—offset losses on electric vehicles with other automobile sales, batteries, other equipment, and services, Li is solely focused on EVs. This makes its unique profitability even more notable.
Li Auto: Growth and an Enviable Market Position
For many new electric vehicle makers, another key dilemma after profitability is scale. Because these vehicles are expensive and complicated to produce, developing the capacity to increase production and delivery can be incredibly challenging.
Li has managed to achieve an astonishing rate of growth by several metrics. The previous quarter’s $810 million in net income is a whopping 2,068% improvement over the quarter one year prior. Q1-2024 car deliveries of just over 80,000 are up about 53% year-over-year. As of the end of March 2024, Li had 474 retail stores in 142 cities, up from 299 stores in 123 cities just a year earlier.
Li is also well-positioned in the massive Chinese EV market. New EV sales in China nearly doubled in 2022, surpassing the growth rate of the U.S. and many European countries that have been early adopters of EVs. More than half of electric vehicles on roads globally are in China, and the country exports more than a third of all EVs. While this market continues to flourish, Li could stand to benefit from both domestic sales and increasing worldwide demand for Chinese exports.
Li Auto’s Delivery Estimate Gets Slashed
Despite the significant growth in Li’s deliveries in recent months compared to a year ago, the company’s recent delivery figures represent a lower volume than originally expected. In March, Li slashed its current-quarter delivery estimate from as high as 103,000 vehicles to an estimated high of 78,000. This contributed to a sell-off in LI shares.
The company attributed the reduction in part to what it called a “mis-paced” operating strategy of its recently launched Li MEGA, a minivan that Li says is the largest passenger EV on the market.
Investors may be cautious to learn that Li has trimmed its delivery estimate. However, it’s important to keep in mind that even a lowered delivery forecast reflects a significant increase in vehicles delivered compared to the prior year. For the first three months of 2023, Li delivered over 52,000 vehicles. If the company achieves its lowered first-quarter 2024 forecast in the high 70,000s, it will be roughly a 50% improvement year-over-year.
Is LI Stock a Buy, According to Analysts?
The recent sell-off in shares means a good opportunity for optimistic investors to buy LI. While LI stock is down about 20% in the last month, it’s up more than 26% in the past year, nonetheless. These factors may contribute to the stock’s unanimous Buy rating among Wall Street analysts. This is based on 10 Buys, zero Holds, and zero Sells. The average Li Auto stock price target of $53.83 implies 80.5% upside potential.
Conclusion: Despite Setbacks, Li Is Well-Positioned for Growth
Despite the need to recalibrate its launch of the MEGA and get its deliveries back on track, Li has strong growth potential based on its profitability, its position within the Chinese EV market, and its track record of successful scalability.
