As concerns related to the global environment escalate, electric vehicles are gaining a multi-year tailwind. In the transition towards electric vehicles, China has been leading the race. It’s forecasted that by 2030, electric vehicles will account for three out of five new cars in China.
Without a doubt, it seems like a good time to remain invested electric vehicle companies. At the same time, it’s important to be selective when considering exposure to electric vehicle stocks. More than 400 companies are already in the electric vehicle business in China.
It goes without saying that there will be bankruptcies and industry consolidation in the coming years. One company that seems positioned to survive the competition and growth at a healthy pace is Li Auto (LI).
In terms of stock price action, LI stock touched lows of $17.0 in May 2021 from an all-time high of $47.7. The correction was triggered by valuation concerns related to electric vehicle stocks, particularly at a time when chip shortage was impacting growth.
However, the correction seems to be over and LI stock has gradually trended higher to current levels of $30.7. Considering the company’s growth trajectory, further upside seems likely. (See Li Auto stock charts on TipRanks)
Strong Vehicle Deliveries Likely to Sustain
The sharp rally in LI stock has been associated with strong fundamental developments.
For Q1 2021, the company reported delivery of 12,579 vehicles. This was higher by 334.4% on a year-on-year basis. Further, for Q2 2021, the company’s vehicle deliveries increased by 166.1% to 17,575 vehicles. Clearly, growth has been stellar.
If we look deeper, there are two important points to note.
First and foremost, the company launched its first model, Li ONE, in November 2019. Growth has been robust and solely driven by one SUV model. Now, the company is investing in developing new vehicles. Once there is a broader portfolio of vehicles, it’s likely that deliveries will surge further.
Furthermore, Li Auto reported having 65 retail stores as of March 2021. By Q2 2021, the company’s retail stores increased to 97 with presence in 64 cities. As the company expands its retail network, strong growth is likely to sustain.
Robust Top-Line Growth and Cash Flows
For Q1 2021, the company reported revenue of $545.7 million. Revenue increased by 319.8% on a year-on-year basis. Considering the vehicle delivery numbers for Q2 2021, strong revenue growth is expected to sustain.
However, there are other important stock upside catalysts. For one, the company’s vehicle margin was 8.4% in Q1 2020. Vehicle level margin has increased to 16.9% as of Q1 2021. As deliveries surge, margin is likely to remain robust.
More importantly, Li Auto reported positive operating cash flow of $141.4 million for Q1 2021. This implies an annualized cash flow of $560 million. The company also reported free cash flow of $87 million for the quarter.
With revenue growth and margin expansion, Li Auto seems well positioned to deliver healthy free cash flows in the next few years. This is important, as the company can invest in growth through internal cash flows than further equity dilution.
It’s also worth noting that Li Auto reported cash and equivalents of $4.6 billion as of March 2021. Additionally, the company raised $862.5 million through a convertible senior note offering in April 2021. The company seems fully financed for the next 12-24 months.
Wall Street’s Take
According to TipRanks’ analyst consensus rating, LI stock comes in as a Strong Buy with 5 Buy ratings assigned in the last three months.
As for price targets, the average Li Auto price target is $45.9 per share, implying around 49.37% upside potential from current levels.
Currently, the company’s only model is a six-seat premium SUV. Given the cash buffer, Li Auto seems well positioned for new launches in the next few years.
With a strong cash buffer, focus on innovation and healthy cash flows, LI stock is worth considering at current levels.
Disclosure: On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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.