Chinese electric-car maker Li Auto (LI) skyrocketed by triple digits just months after its July 2020 Nasdaq debut, as Wall Street placed big bets on EV stocks and the future of mobility. Many of last year’s highflying stocks experienced huge declines in the first several months of 2021 as money rotated into economic recovery plays. But Li and its China EV peers are looking to make a comeback. Is Li Auto stock a buy now?
Founded in 2015, the Beijing-based company competes directly with Tesla (TSLA) and Nio (NIO) in the high-end EV market. The company debuted its first and only model, an electric hybrid SUV called the Li ONE, in December 2019. That vehicle carries a price tag ranging from $29,000 to $76,000 and was one of China’s top-10 sellers across all fuel types in 2020.
However, Li Auto stock has yet to show investors it can be consistently profitable. And even though Li is seeing strong vehicle deliveries, it’s competing not only against Tesla and China EV peers, but established U.S. automakers like Ford (F), General Motors (GM) and Volkswagen (VW) as they enter the China market.
If you’re thinking about buying shares of Li Auto, it’s key to analyze the fundamental and technical picture first.
LI Stock Volatile Amid China Crackdowns
China EV stocks sold off on Sept. 20 as a developing crisis in China’s property sector rippled into the broader market.
Investors are increasingly concerned that Beijing will let property developer China Evergrande Group fail, resulting in losses for shareholders and bondholders. The real estate company’s debt burden is the biggest for any publicly traded real estate management or development company in the world, according to The Wall Street Journal.
China’s real estate market woes come as Beijing expands regulatory crackdowns. In July, the government outlined plans to apply new restrictions on the country’s education sector. That news sent a swath of Chinese stocks lower as investors anticipate a spread of restrictions beyond the education sector. Li Auto stock fell more than 6% on the news. Nio and Xpeng also fell about 5%.
The sell-off continued on July 27 as Beijing regulators turned their eye toward the food-delivery sector. Li Auto tumbled 14% as China stocks continued to slump under regulatory pressures. Notably, Cathie Wood’s ARK Invest rapidly sold off its positions in Chinese tech stocks due to increased uncertainty.
On July 28, China state-media tried to soothe investors by dismissing the China stock meltdown as a “venting of emotions.” The words appeared in a front-page editorial of the Securities Times on Wednesday. Regulators added that “economic fundamentals have not changed and the market will stabilize at any moment.”
Cuts Q3 Delivery Guidance
Li Auto also cut its guidance for vehicle delivery numbers in the third quarter due to ongoing chip supply shortages. On Sept. 20, the company revised its delivery numbers for Q3 to 24,500 vehicles. Li originally projected deliveries of 25,000 to 26,000 vehicles for that period.
Li Auto reported August deliveries of 9,433 vehicles on Sept. 1. That represented an increase of 248% year over year and a new monthly record. In July, Li surpassed the 8,000-vehicle delivery threshold for the first time.
Li Auto’s sales outpaced rivals like Xpeng (XPEV), which reported 7,214 vehicle deliveries for August. Nio logged 5,880 car deliveries.
Li Auto sales also rose vs. July, while Xpeng and especially Nio reported sequential declines. Li Auto stock rose.
Those sizable monthly numbers come as Chinese EV makers deal with chip shortages and other supply-chain issues plaguing the auto industry. China stocks also face pressure as Beijing cracks down on private industry, including U.S.-listed Chinese companies. So far regulators have not turned their attention toward automakers or EV companies especially. But China is interested in data from driver-assist technologies.
Li Auto Earnings
Li Auto beat estimates for Q2 earnings in late August, with a loss narrowing to one cent per share on an ADS basis. Revenue hit $780.4 million, a 183% increase year over year, driven by higher deliveries. The company started volume production of the Li One in November 2019 and released a refreshed 2021 Li One in May.
Shares fell after earnings but found support at the 200-day line.
Li Auto sold 17,575 of its hybrid-electric Li One SUVs in Q2. That marked a quarterly record and a 166% jump year over year. For Q3, Li Auto expects to deliver between 25,000 and 26,000 electric vehicles, which would be an increase of 189% to 200% from the third quarter of 2020. Strong Q3 projections have Li Auto outselling rival Nio in the China EV market.
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Tesla Announcement A Temporary Boost
Chinese EV stocks in July jumped alongside news that Tesla plans to open access to its Supercharger network to other automakers by the end of the year. On July 20, Tesla CEO Elon Musk confirmed the news via Twitter.
“We created our own connector, as there was no standard back then and Tesla was the only maker of long-range electric cars,” Musk tweeted. “That said, we’re making our Supercharger network open to other EVs later this year.”
While Tesla stock edged lower that day, LI stock jumped 8.7% on July 21. Xpeng and Nio shares popped 8% and 6%, respectively. But the boost was temporary.
Li Unveils 2021 SUV Model
Li Auto rolled out the 2021 version of the Li ONE on May 25. The latest model includes upgrades to its advanced driver-assistance system (ADAS) and powertrain systems.
These improvements will extend the range capacity of the Li ONE to 1,080 kilometers, or 671 miles. Deliveries of the vehicle began in June.
Li Auto’s focus on cost-effective SUVs is the heart of its business strategy. The company was one of the first to successfully commercialize Extended Range Electric Vehicles (EREVs), which require a smaller battery pack. A smaller battery means lower production costs. And multiple power sources provide consumers with a practical solution to China’s notorious lack of battery charging infrastructure.
Electric Cars In China: Competition Heats Up
Competition for Chinese EV sales is heating up as more legacy automakers eye the market. Li Auto primarily competes against Tesla’s Model Y in the high-end SUV space. But that segment is beginning to get crowded as automakers look to cash in on growing demand and claw back Tesla’s market share.
China EV sales growth is expected to hit 50% in 2021, according to research group Canalys. A record 1.3 million electric cars were sold in China last year. That number represented about 41% of global EV sales in 2020.
Volkswagen and Ford are two legacy names jumping into the China market. The automakers unveiled new SUV brands at the Shanghai Auto Show in April: the Ford EVOS and Volkswagen ID.6. The Li Auto ONE also will compete with Ford’s Mustang Mach-E and the Volkswagen ID.4.
Chinese brands are stepping up their offerings, too. Nio revealed plans for a new line of luxury electric cars, called Gemini, in June. And BYD (BYDFF), which won the backing of Berkshire Hathaway (BKRB) CEO Warren Buffett, is making a push into the luxury market.
Li Auto Fundamental Analysis
To determine whether Li Auto stock is a buy now, it’s key to conduct fundamental and technical analysis.
The IBD Stock Checkup tool shows Li Auto stock has an IBD Composite Rating of 55 out of a best-possible 99. The rating measures a stock based on the most important fundamental and technical stock-picking criteria. IBD research shows some of the greatest stock winners of all time often have a Composite Rating of at least 95 near the start of big runs.
The Composite Rating looks at earnings and sales growth, profit margins, return on equity and relative stock price performance, among other metrics.
LI stock has an EPS Rating of 32 out of 99. That rating compares quarterly and annual earnings-per-share growth with all other stocks. Relatively recent IPOs typically don’t have a long track record of profitability. But the automaker boasts strong sales and is seeing increased mutual fund ownership. Li expects to achieve profitability in 2022.
The proprietary IBD rankings place the Chinese maker of electric cars in the No. 9 spot vs. its automotive industry peers. The automaker group is ranked No. 95 out of the 197 industry groups tracked by IBD. It’s ideal to focus on top stocks in the top quartile of IBD’s groups.
Li Auto Stock Technical Analysis
Li Auto stock has been volatile as of late due to uncertainty under China’s regulatory regime. After closing above the 36 mark at the start of July, LI stock began to consolidate. A 14% loss on July 27 in above average volume sent shares below the 50-day and 200-day lines. This would be considered a sell signal for investors who held positions in Li Auto stock from aggressive entries.
LI stock is trying to form a consolidation. Worries of China’s real estate crackdowns roiled the overall market on Sept. 20 and sent many China stocks lower. Li Auto stock tumbled 6%, dropping back below its 200-day line.
Pullback After Hot IPO Launch
Li Auto was a hot new IPO in 2020. The company made its Nasdaq debut on July 31 at 11.50 per share. Over the next few months, Li Auto stock skyrocketed 315% from that IPO price and topped out at a Nov. 27 high of 47.70. Then, amid a rotation into cyclical stocks and a global chip shortage, shares were brought back to earth.
Li Auto plunged below the 16 price mark by May 2021. But shares are breaking their downtrend and moving back above key resistance levels. In late May, Li Auto stock closed above its 10-week line for the first time since February and powered above its 40-week moving average in early June. Shares jumped more than 45% in the month of June as EV stocks roared back.
LI stock is forming a base with a 36.76 buy point. A declining-tops trend line potentially could be utilized for an earlier entry. Investors should be aware that unexpected crackdowns by Chinese regulators can pose an additional risk when trading China stocks.
LI Stock: A Buy Right Now?
On a monthly stock chart, Li Auto stock in June broke a downtrend. Looking at a weekly chart, the stock is holding support at its 40-week line, a key technical level. As for fundamentals, Li Auto sales have seen exceptionally strong growth over the last two quarters. Electric cars remain a compelling growth story.
Bottom line: Li stock is not a buy right now. Though Li is holding above the prior lows of its base, it is back below the 200-day line. The 50-day line has proved to be a level of significant resistance over the past month. A move above that critical level would put the stock closer to an entry above a declining-tops trend line. Caution is warranted with aggressive entries due to the heightened risk around China stocks.
To find the best stocks to buy and watch, check out IBD’s Stock Lists page. More stock ideas can be found on our Leaderboard and MarketSmith platforms.
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