Stock Market

LI Stock Analysis: What the Market Is Telling Us About Li Auto

Li Auto (NASDAQ:LI) stock saw profit taking after reporting record earnings for the June quarter.

Li earned $300 million, 30 cents per ADR share fully diluted, on revenue of $3.95 billion during the quarter. Deliveries more than tripled from a year ago, to 86,533 vehicles.

Despite this, shares hit an air pocket, falling from $46.63 to $41.41 in early New York trade on Aug. 8. Investors got 40% of the loss back by midday August 10, the shares trading at $43.46.

China Syndrome

Li stock saw a bigger impact from new constraints on investment the Administration laid on China than the positive earnings news. China’s government was not amused, calling the move “blatant economic coercion.”

While I have long been high on Li as a company, I suggested investors pump the brakes on the stock last month. At the time Li was selling at a little over $38 per share.

My concern is not just over tensions between the U.S. and China, but on China’s economy and what it portends for Li.

Li makes battery-first hybrids that appeal to wealthy cadres who are having kids to stay on the good side of President Xi Jinping. But China’s growing economic problems make me question how long Li’s strategy can succeed.

Message of the Market

While Li has fallen from its recent highs, it’s still the best Chinese EV stock you can buy in New York.

XPeng (NASDAQ:XPEV) got a boost from its recent tie-up with Volkswagen (OTCMKTS:VWAGY) and is up 70% in 2023, but Li is up 111%, even with its pullback.

Nio (NYSE:NIO), which is exporting cars to Europe and doubled its deliveries in July, is up 37%. Polestar (NASDAQ:PSNY), controlled by China’s Geely (OTCMKTS:GELYF) but based in Sweden, is down 23% on the year as it delays plans to assemble cars in South Carolina.

The market’s message seems clear. The low energy density of today’s lithium-ion batteries forces trade-offs on size, range, and cost. A big car needs a heavier battery to get anything like an acceptable range.

Li’s SUV is in the sweet spot, getting about 200 miles on a battery charge but 800 miles when gasoline is used. This means it can act as an electric in-town, charged overnight, but there are no fears of getting stuck without energy in the middle of nowhere.

Small electrics like those from BYD (OTCMKTS:BYDDF) outsell Tesla (NASDAQ:TSLA) in China, but big electrics from Ford Motor (NYSE:F) aren’t selling well here, while prices on rival Rivian (NASDAQ:RIVN) EVs are falling.

The only mid-market electric from an American company is the General Motors (NYSE:GM) Chevy Bolt, which weighs half as much as a Ford F-150 Lightning. The Administration has provided incentives for lower-cost electrics, and for U.S. battery production.

The Bottom Line

Chinese stocks of all types will trade at a discount to their value in the U.S., so long as relations between the two countries remain tense.

At its current price Li is selling for just 3 times its sales run rate of $16 billion, dirt cheap when Tesla sells for 9 times sales. But Tesla has battery, service, and electricity revenue alongside its cars.

Investors compare them to the high-profit service revenues of Apple (NASDAQ:AAPL).

China’s economy is a second reason to discount Li. The company may be able to keep growing for a year or two inside its present niche, without resulting to export.

Meanwhile I would rather own Toyota (NYSE:TM), at 11 times earnings, or another big hybrid maker.

As of this writing, Dana Blankenhorn had a LONG position in AAPL. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

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