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While electric vehicle (EV) stocks were a much sought-after asset class just a couple of years back, it now seems more like a “sunset industry” and less like the promising growth story it once was. Things have been particularly bad for Chinese EV companies, which are battling the double whammy of a slowdown in China and the structural derating of Chinese shares.
Specifically, NIO (NIO) stock is now at its lowest level since 2020, as the company once-hailed as the “Tesla of China” has failed to live up to the market's high expectations. Xpeng (XPEV) has also faltered after a strong 2023, when it announced groundbreaking partnerships with Volkswagen (VWAGY) and China’s ride-hailing leader Didi.
However, Li Auto (LI) stock has fared much better than its peers, thanks to its strong operating and financial performance.
Li Auto Stands Out Among Emerging Chinese EV Companies
Li Auto has several laurels to its name. For instance, last year it hit the milestone of becoming the first emerging Chinese EV company to surpass 600,000 cumulative deliveries and 50,000 monthly deliveries. Importantly - unlike most other emerging EV companies, which are burning cash and need regular capital infusions - Li Auto has been a cash flow powerhouse. The company generated free cash flows of $6.22 billion in 2023, and held $14.6 billion as cash and cash equivalents on its balance sheet.
While not an apples-to-apples comparison, EV industry giant Tesla (TSLA) generated free cash flows of $4.4 billion last year, and had $29.1 billion as cash and cash equivalents at the end of the year.
Li Auto Stock Fell After Lowering Its Delivery Guidance
Li Auto has impressed markets with its deliveries for the last several quarters. During the Q4 2024 earnings call in late February, the company guided for deliveries between 100,000-103,000 in Q1 2024. The guidance looked impressive, considering the sales slump in the first two months of the year due to the Lunar New Year holidays in China.
However, the company last week lowered its guidance to between 76,000 and 78,000 vehicles, and admitted that the operating strategy of its new MPV Li MEGA was “mis-paced.” Li is now fine-tuning its strategy, and said it would “first focus on our core user group and target cities with stronger purchasing power” before moving to other cities.
Li Auto's CEO, Xiang Li, said, “We put excessive emphasis on sales volume and competition, distracting us from what we excel at — creating value for our users and driving operating efficiency. We will lower our delivery expectations and restore sustainable growth by refocusing on enhancing user value instead of competition, while maintaining operating efficiency.”
China’s EV Bloodbath
There were as many as 500 EV companies in China at one point in time. However, amid the slowing growth and continued losses in the industry, there has been consolidation. That said, unlike the U.S. - where the adoption of electric cars hasn’t been to the scale that automakers, markets, and the government expected - more than one-third of the cars sold in China last year were either battery electric or hybrid.
No wonder, then, that BYD (BYDDY) has become the largest seller in the category known as “new energy vehicles” in China. And in Q4, the Chinese giant surpassed Tesla to become the world’s biggest seller of battery electric cars.
Li Auto Stock’s Forecast Looks Bullish
While analyst sentiment toward Li Auto soured after last week’s guidance cut, with Citi and Barclays lowering their target prices, the overall mood is still quite bullish, and the stock has a consensus rating of “Strong Buy.” Li Auto’s mean target price of $52.73 is almost 73% higher than yesterday’s closing price.
Notably, Li Auto is among the most highly rated stocks in the EV space at a time when analysts, including long-standing bulls like Adam Jonas of Morgan Stanley, have been pruning Tesla’s target price.
Personally, I believe that the worst is over for Li Auto, and the stock is due for a rebound. Here’s why:
- The EV industry turmoil is now in the latter stages, and automakers have been adjusting the supply to match demand. Coupled with further consolidation in the Chinese EV industry, this should help to restore price discipline.
- Li Auto has strong financials, with free cash flow-generating operations. The healthy balance sheet will help Li to better cope with the current EV industry bloodbath at a time when several weaker players might not survive for long.
- LI stock's valuations look quite compelling after the recent fall. After adjusting for the massive cash that it holds, the enterprise value comes to just around $18 billion, which gives us a trailing enterprise value-to-sales multiple of around 1x. While the forward multiples look even more mouth-watering, I believe the current sales estimates for Li Auto are a bit too high, and analysts might lower their estimates amid the slowing growth.
Overall, while the EV industry bloodbath might not get better anytime soon - and we might continue to hear more negatives, like guidance cuts and even bankruptcies - Li Auto nonetheless looks like a name worth betting on, given the strong track record on execution and financially self-sustaining operations.
On the date of publication, Mohit Oberoi had a position in: TSLA , NIO , XPEV , LI . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
