Li Auto’s Deliveries Are Surging. Is The Stock Still Undervalued?

Chinese luxury electric vehicle maker Li Auto stock delivered 34,914 vehicles for the month of August, marking a greater than 7x increase over the last year. This is well ahead of rivals such as Nio and Xpeng, which sold about 19,329 (81% year-over-year increase) and 13,690 (43% year-over-year increase). Li Auto is benefiting from robust sales of its high-end EVs which sport electric drivetrains along with a gasoline-powered range extender generator that helps to reduce range anxiety. While the company had only one vehicle model until 2022, it has since launched three vehicles including the Li L9, a luxury full-size crossover SUV, the Li L8, a luxury mid-size crossover, and the L7. These new vehicles are helping Li cater to a larger customer base, with each of its Li L7, Li L8, and Li L9 models surpassing 10,000 unit sales in August.

Interestingly, Li has had a Sharpe Ratio of 0.5 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This also falls short of the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

The near-term outlook also looks strong. Li has previously guided that overall monthly sales could top 40,000 units in Q4. Li appears to have sufficient bandwidth to scale up, with monthly production capacity standing at 50,000 a month. The company is also expected to launch its first pure-battery EV model called MEGA by the end of this year, with a range of about 500 miles. The company expects the vehicle to be a top seller in the $ 70,000-plus segment of the Chinese EV market.

So does the stock still look like a buy? While demand for Li’s new models is very strong, the company’s fundamentals are also improving. Surging volumes are helping Li Auto increase its margins. Gross margins for the quarter ended June improved to 21.8%, which is now actually ahead of Tesla, which reported gross margins of just 18.2% in its most recent quarterly report. This is well ahead of rivals Nio and Xpeng, who have seen margins slip to single digits or negative levels, partly due to price cuts. Li trades at just about $39 per share, just slightly off all-time highs seen recently. In relative terms, the stock presently trades at almost 3x estimated 2023 revenues. Although this is ahead of Chinese rival Nio, it is below the likes of Tesla and Xpeng. Considering Li’s superior growth and profitability, this is a reasonable multiple. See our analysis of Nio, Xpeng & Li Auto: How Do Chinese EV Stocks Compare? for a detailed look at how Nio stock compares with its rivals Li Auto and Xpeng.

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