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Why Li Auto Still Has Upside In The Tank

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·4 min read
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Are investors losing confidence in Li Auto (LI) stock? The China-based EV maker’s shares have pulled back on the heels of disappointing delivery numbers. Year-over-year, Li’s numbers look impressive. But, looking at sequential deliveries between December and January, sales have taken a slight dip.

This may be a sign that overall, China EV growth in 2020 had to do with pent-up demand from the COVID-19 pandemic rather than a rapid acceleration in EV adoption.

Its main publicly traded rivals, Nio (NIO) and Xpeng (XPEV), continue to show sequential delivery growth. However, in the case of both, the rate of growth is slowing down as well.

This in-and-of itself is not an issue. Yet, given that LI, much like its peers, trades at a rich valuation (more than 1,900x estimated 2021 earnings), it can’t afford to see its growth start slowing down this soon.

Yet, there may be one factor that could help Li Auto get back on track. The unique features of its plug-in hybrid vehicles could give it an edge, given that battery technology remains behind customer expectations.

LI Stock: Slowing Growth Could be a Red Flag

It makes sense why investors are super bullish on China EV stocks. With China’s electric vehicle market set to quadruple in the next four years, according to the Detroit Bureau, even “also-ran” names could see their sales rise substantially in the 2020s.

However, this catalyst is more than reflected in the LI stock price. Given how shares were trading sideways before last week’s mixed results, perhaps investors were starting to think shares have gone up too far, too soon.

In order to keep enthusiasm for the stock going, Li needed good delivery numbers for January. Unfortunately, this didn’t happen. That said, this slump may not last for long.

Why? The unique aspects of this EV (technically a hybrid vehicle) might give it an edge, as competition heats up in the world’s largest car market.

Hybrid EVs May Help Get LI Out of its Current Slump

LI stock may be thought of as an EV play. However, this company does not make fully electric vehicles. Instead, its cars and SUVs are plug-in hybrids. This allows the car to run mostly on green-friendly electric power. But, when the battery runs low, the fuel tank is kicked into action to charge the battery.

Yes, this sounds a bit oxymoronic. Isn’t the point of electric cars to stop the use of fossil fuels? Having said that, as battery technology still has a ways to go before it’s on par with internal combustion vehicles, hybrid solutions like this one may be the perfect “bridge” for China’s automotive future.

With the competition heating up, this unique factor may give this company an edge, and signal to investors there’s enough “in the tank” to send Li Auto stock to new highs.

In the near-term, retail investors may be losing interest in this EV play. But what does the sell-side community think? Let’s take a look and see how shares stack up with analysts.

Wall Street Analysts Remain Highly Bullish on LI Stock

Turning to Wall Street analysts, Li Auto stock scores a Strong Buy consensus rating. With 6 Buy ratings, 2 Hold ratings, and no Sell ratings, analysts are as confident in this EV maker’s prospects as they are with other popular names.

As for price targets, the average analyst price target for LI stock is $43.64 per share. In other words, around 43.7% possible upside from today’s prices. (See Li Auto stock analysis on TipRanks)

Bottom Line: Valuation Looks Rich, But Li Auto Could Continue to Surge

Right now, some think the party’s over for Li Auto. After surging along with other popular US and China-based electric vehicle stocks, shares have underperformed since the start of the new year.

Disappointing sequential delivery growth numbers haven’t helped to bolster confidence. But, it’s not over just yet. The fact that it offers plug-in hybrid vehicles could give it an edge over the competition.

Although the valuation looks rich, LI stock is still a great growth story at today’s prices ($30.36 per share).

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.