Will Li Auto (NASDAQ:LI) survive after today’s disaster? The buyers are reeling, no doubt, but they shouldn’t despair. As often happens in the financial markets, investors’ fears about the future are probably exaggerated. The reality of the situation might not be as bad as you think, and as a bargain hunter, I’m bullish on LI stock now.
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China-based Li Auto is a manufacturer of electric vehicles (EVs). It’s a tough time to be involved in the EV industry, especially in China, where the economy is unsteady and the government isn’t always business-friendly. The market is fully aware of this, but LI stock traders were surprisingly unforgiving and relentless today.
I certainly won’t claim that Li Auto is firing on all cylinders, financially speaking. There are challenges to overcome and improvements to be made. That said, EV industry enthusiasts and contrarian investors ought to take a look at Li Auto and focus on the facts, which aren’t as dire as the panic sellers may assume they are.
Li Auto Plummets Toward a Key Price Level
A long-term price chart of LI stock shows that whenever the stock has dipped below $20, it didn’t stay there very long and soon recovered. Of course, past performance isn’t a guarantee of future results, but it’s certainly interesting to see the stock head toward $20 again.
Granted, it can be scary to buy a stock while it’s a “falling knife.” Li Auto stock fell today, while the stock market was generally uneventful. The culprit, as you might have suspected, was Li Auto’s first-quarter 2024 results and current-quarter guidance.
Clearly, the market took a glass-half-empty view of Li Auto’s current and expected future results. Starting with the Q1-2024 operational data, it’s a “good news, bad news” situation, depending on the time frame you’re using.
First of all, Li Auto delivered 80,400 vehicles during the quarter, up 52.9% year-over-year. That sounds quite bullish, but what if we reduce the look-back period? Then, it’s not so bullish because Li Auto delivered 131,805 vehicles in 2023’s fourth quarter. Some short-term investors may have found this result to be unacceptable and dumped their LI stock shares, even though the automaker’s long-term vehicle-delivery trajectory is still moving higher.
Similarly, Li Auto’s Q1-2024 revenue grew 36.4% year-over-year to 25.6 billion RMB ($3.6 billion in U.S. dollars), but it also declined 38.6% when compared to the 41.7 billion RMB that Li Auto recorded in the fourth quarter of 2023. So again, whether this is bullish or bearish depends on your time frame. Personally, I’m willing to be more forgiving about Li Auto’s quarter-over-quarter shortfalls because China’s economy has been unpredictable.
Turning to the bottom-line results, Li Auto reported non-GAAP net income of 1.3 billion RMB ($176.8 million), down 9.7% year-over-year but also down 72.2% quarter-over-quarter. This is more difficult to forgive, I’ll admit.
Pricing Is the Problem
Before you run for the hills and avoid LI stock altogether, take into consideration China’s economy as well as the EV industry’s pricing pressures. These may be temporary issues, and if they’re resolved later this year, the Li Auto share price could rebound quickly.
According to Barron’s calculations, Li Auto’s first-quarter 2024 average revenue per car sold was “roughly $42,000, down about $8,000 from a year ago.” As you may be aware, there’s an EV-pricing war happening this year in China, and Li Auto undoubtedly had to compete with Tesla (NASDAQ:TSLA) and other rivals.
The point is that the EV pricing war surely had an impact on Li Auto’s financial results and those of the company’s competitors. These situations might feel endless, but they don’t last forever. Pricing wars can actually strengthen the winners while the laggards drop out of the race.
Looking ahead, Li Auto guided for current-quarter vehicle deliveries of 105,000 to 110,000 units; this would represent an increase of 21.3% to 27.1% year-over-year, so I’d say it’s fairly optimistic. The automaker also guided for Q2-2024 revenue of 29.9 billion RMB ($4.1 billion) to 31.4 billion RMB ($4.3 billion), which would signify year-over-year growth of 4.2% to 9.4%
That doesn’t sound terrible, in my opinion. However, Wall Street estimated current-quarter revenue of around $5.2 billion, representing growth of roughly 30%. That sounds like an awfully high estimate, if you ask me, so maybe some folks simply expect too much from Li Auto.
Is Li Auto Stock a Buy, According to Analysts?
On TipRanks, LI comes in as a Strong Buy based on 12 Buys and one Hold rating assigned by analysts in the past three months. The average Li Auto stock price target is $48.26, implying 122.3% upside potential.
Conclusion: Should You Consider Li Auto Stock?
Li Auto’s profit drop-off will probably shock some investors, and that’s understandable. However, not all of Li Auto’s results were bad. Moreover, the company’s current-quarter guidance isn’t really objectionable, even if it falls short of some people’s lofty expectations.
There is risk for anyone who chooses to invest in Li Auto. However, with the share price falling to a low level, much of that risk is evidently priced into the stock. Consequently, I am bullish on LI stock at its reduced price point and would consider purchasing a few shares.
