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Elevator Pitch
I have a Hold investment rating for Li Auto Inc.’s (NASDAQ:LI) shares. LI’s stock price rose sharply in June 2022 as a result of above-expectations deliveries for the Li ONE and initial orders for the Li L9. But I think that Li Auto’s shares will trade sideways rather than continue going up. This is because LI’s valuations are reasonably fair following its share price outperformance in June, and I see both tailwinds and headwinds relating to Li Auto’s future business outlook. This explains my Neutral view and Hold rating for LI.
Why Did Li Auto Stock Go Up So Much In June?
Li Auto’s stock price went up substantially in June 2022, as highlighted in the chart below.
Li Auto’s June 2022 Share Price Performance
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As per the chart presented above, LI’s shares surged by +48.2% in the past month, which was much better than the S&P 500’s -6.6% decline in June. More significantly, Li Auto also outperformed its key Chinese EV (Electric Vehicle) peers, as the shares of NIO Inc. (NYSE:NIO) and XPeng Inc. (XPEV) increased (to a lesser degree) by +21.6% and +32.2%, respectively during the same period.
Li Auto’s share price outperformance in June 2022 is attributable to stronger-than-expected deliveries, and the better-than-expected response to the launch of the Li L9 which the company refers to as its “flagship smart SUV (Sports Utility Vehicle).” I detail the key metrics relating to LI’s deliveries and L9 orders in the next section.
LI Stock Key Metrics
On June 1, 2022, Li Auto revealed that the company’s deliveries expanded by +165.9% YoY and +175.9% MoM (Month on Month) to 11,496 units in May 2022. The growth in LI’s deliveries for May was also superior to that of its peers. XPeng’s YoY and MoM growth in deliveries in May 2022 were +78.0% and +12.5%, respectively. NIO achieved a +4.7% YoY and +38.4% MoM increase in deliveries during the same period.
More importantly, the recovery in deliveries for LI and its peers in May implied that the Chinese EV industry has already seen the worst of supply chain disruptions in April; Li Auto’s deliveries contracted by -62% MoM in that month. This optimistic view was validated by the June 2022 operating data for LI just released last Friday, which disclosed that LI’s deliveries in the prior month grew by +68.9% YoY and +13.3% MoM to 13,024 units. This brings Li Auto’s Q2 2022 deliveries to 28,687 units, and this exceeded its guidance of deliveries between 21,000 units and 24,000 units for the second quarter.
Separately, Li Auto highlighted in a June 24, 2022 press release that “the orders for Li L9” surpassed “30,000 in 72 hours since the vehicle was available for reservation” on June 21, 2022. This is significant for a number of reasons.
Firstly, the Li L9 is Li Auto’s only second product after the Li ONE. The Li L9 orders offer an indication of how successful LI is replicating the success of its Li ONE with other new products.
Secondly, LI has recorded a substantial numbers of orders for the Li L9, even prior to the commencement of test drives for the Li L9 in mid-July. This shows that many buyers have confidence in the Li Auto brand.
Thirdly, the Li L9 doesn’t appear to have cannibalized the sales of the Li One, as evidenced by Li Auto’s strong June 2022 deliveries which are contributed entirely by the Li ONE product. On the flip side, it will have been worrying if Li Auto’s deliveries had slowed in June 2022, suggesting that a significant number of consumers were adopting a “wait and see” approach in choosing between the new Li L9 and the existing Li ONE.
The data pertaining to monthly deliveries and orders for the Li L9 are the key metrics that drove Li Auto’s share price up in June 2022.
I touch on Li Auto’s consensus sell-side price target, valuations, and its business outlook in the subsequent sections.
What Is The Target Price For Li Auto Stock?
Considering LI’s share price surge in June, it is worthwhile to review Wall Street’s consensus target price for Li Auto’s stock to have a sense of how the market thinks about LI’s current valuations.
The current mean sell-side target price for LI is $43.42, which implies a +15% upside as compared to Li Auto’s last done share price of $37.70 as of July 1, 2022. In my opinion, a capital appreciation potential of +15% is insufficient to justify a Buy rating, as I will demand at least a hurdle rate of +20% to be bullish on any specific stock. Furthermore, the median Wall Street price target for Li Auto as per S&P Capital IQ is an even lower $41.60 that translates into a mere +10% upside.
In the next section, I compare LI’s valuations with its peers to determine if LI is overvalued or undervalued.
Is Li Auto Overvalued Now?
LI Auto is currently fairly valued, and not overvalued.
Li Auto’s Peer Valuation Comparison
| Stock | Consensus Forward Next Twelve Months’ Price-to-Sales Multiple | Consensus Forward Next Twelve Months’ Enterprise Value-to-Revenue Multiple | Consensus Forward FY 2022 Revenue Growth Metric | Consensus Forward FY 2023 Revenue Growth Metric | Consensus Forward FY 2022 Gross Margin |
Consensus Forward FY 2023 Gross Margin |
| Li Auto | 4.01 | 3.32 | +95.1% | +83.1% | 21.8% | 22.1% |
| XPeng | 3.98 | 3.30 | +94.9% | +73.8% | 13.7% | 16.6% |
| NIO | 3.43 | 3.07 | +68.6% | +76.0% | 17.0% | 19.4% |
Source: S&P Capital IQ
Based on the peer comparison table presented above, LI trades at a premium to its Chinese EV peers based on the forward price-to-sales and enterprise value-to-revenue multiples. This is justified by Li Auto’s relatively superior consensus top line expansion and gross profit margins. In other words, one can’t make a case for a positive re-rating of LI’s valuation multiples based on a mispricing in terms of relative valuations.
In summary, I see LI’s shares as fairly valued, taking into account the sell-side’s median and mean price targets for Li Auto and the peer valuation comparison for the stock.
Will LI Stock Continue To Go Up?
I am of the view that LI stock will trade sideways in the near term after its share price outperformance in June. In terms of valuations, I think Li Auto is a fair valuation as discussed earlier, implying limited room for substantial increase in its share price anytime soon. With respect to the business outlook, I have a mixed view of LI’s future prospects which I elaborate in greater detail in this section.
On the positive side of things, the sales momentum for Li Auto’s Li ONE is strong as seen with its June 2022 data, while the initial response to the new Li L9 has been good as indicated by the significant number of orders in the first three days. Specifically, I estimate that the new Li L9 might be able to generate steady monthly deliveries of around 10,000 units in the future, which won’t be that far away from Li One’s current monthly deliveries which exceeded 11,000 units for both May and June 2022.
On the negative side of things, LI is currently very much focused on SUVs and EREV (Extended Range Electric Vehicle) products, and the company could face issues if either falls out of favor with buyers.
With the ongoing advancements in charging technologies, BEVs (Battery Electric Vehicles) could potentially become more popular. Li Auto already has plans to mitigate such risks with the intention to introduce BEVs as well. At its Q1 2022 earnings call, Li Auto emphasized that it is “investing in R&D for next-generation electric vehicle technology” so as to achieve “the goal of building an end-to-end BEV and charging ecosystem.” But LI might lose some of its edge in the Chinese EV market, assuming that EREV technologies do become obsolete with the passage of time.
Similarly, if sedans and MPVs (Multi-Purpose Vehicles) take share away from SUVs in China, it will hurt LI’s future sales. Li Auto’s focus on SUVs is linked to both its strategy of targeting families and the nature of EREV technologies. LI noted at its first-quarter investor briefing that “when we started building range extended vehicles, we realized that the best body type was SUVs because neither sedans or MPVs were a good fit from a packaging standpoint.”
In conclusion, my view of LI’s future business outlook is mixed, based on an analysis of potential tailwinds and headwinds. I am encouraged by Li Auto’s Li One deliveries and Li L9 orders, but I think that LI’s focus on SUVs and EREV products could be a risk factor if the market environment changes.
Is LI Stock A Buy, Sell, or Hold?
LI stock is rated as a Hold. After reviewing Li Auto’s current valuations, and the company’s growth potential and risk factors, I deem Li to be worthy of a Hold rating as I see a balanced risk-reward for the stock now.
