Li Auto (NASDAQ:LI) is the best-performing of China’s new energy vehicle (NEV) manufacturers. However, the stock has plummeted in recent weeks amid weakening demand in the electric vehicle space and following Li’s recent decision to match Tesla’s (NASDAQ:TSLA) price cuts. Personally, I think we should see Li’s decision to challenge Tesla as a positive one. It highlights the company’s financial capacity to compete for market share. And at just 12.6x forward earnings, it’s very cheap. I’m bullish on LI stock.
Li Auto Stock Can Afford to Go Toe-to-Toe With Tesla
Tesla has committed to price cuts on its models in the U.S., China, and Germany amid falling sales and seemingly weak demand for electric vehicles. It’s by no means the first time Elon Musk’s company has elected to chop prices in an effort to carve out more market share, but it’s particularly interesting given the apparent weakness of the market.
Li Auto stock has plummeted since Tesla’s announcement and its own announcement that it will follow Musk’s price cuts. Li’s price cuts apply to both new orders and existing undelivered pre-orders for the 2024 Li L7, Li L8, Li L9, and Li Mega. Essentially, it’s the whole range, with the exception of the new Li L6.
Most vehicles in the L-series have seen a price drop of 20,000 yuan, while the new Li Mega — its first Battery Electric Vehicle (BEV) — will see a 30,000 yuan reduction. The Li L6 — the only vehicle not to be reduced in price — was launched on April 18 and was already priced at a 5% discount to the Tesla Model Y in China. The L-series are what are known as extended-range electric vehicles (EREVs). They also have combustion engines.
While going toe-to-toe with Tesla will negatively impact margins, Li is one of the few companies that can truly compete with Elon Musk’s company. Li Auto currently sits on a $14 billion cash pile with almost no debt. It’s also profit-making, which can’t be said for a lot of its peers. As such, the company is in a strong position to stomach a short-term drop in profitability.
Li Auto Stock Is Too Cheap to Ignore
Li Auto is currently trading at 12.6x forward earnings. Unsurprisingly, that’s a lot cheaper than it has been, with the stock shedding 37.5% since the beginning of the year. The obvious comparison here is with Tesla, which is currently trading at 63x forward earnings.
But what’s surprising is that Tesla doesn’t offer stronger growth, according to forecasts — at least across the medium term. Li Auto is expected to grow earnings by 19.3% annually over the next three to five years. Meanwhile, Tesla’s growth rate is forecasted to be just 8.4%.
Li Auto’s expected growth rate also creates very compelling forward metrics. The stock is currently trading at 9.4x expected earnings for 2025 and 7.4x forecasted earnings for 2026. As such, we’re also looking at a price-to-earnings-to-growth ratio of 0.65. In this current market, I’d suggest it’s very hard to find valuations as attractive as this.
The falling share price comes at an exciting time for the company as it launches new models into the BEV market. Li’s Mega received mixed reviews, with the firm getting embroiled in an argument over the car’s appearance. However, it’s undeniable that the vehicle is packed full of top-of-the-range gadgets, and its charging time — 12 minutes — is sector-topping.
After a poor Q1 — which followed an incredible 2023 — the expansion of the company’s range into the BEV market could allow it to navigate falling demand by appealing to a wider range of customers.
Is Li Auto Stock a Buy, According to Analysts?
Li Auto Stock is rated a Strong Buy on TipRanks based on 10 Buy ratings and no Hold or Sell ratings from analysts. The average Li Auto stock price target is $53.83, with a high forecast of $65.00 and a low forecast of $39.00. The average price target represents a 129.8% change from the last price. Even the lowest share price target represents considerable upside from the current stock price.
The Bottom Line on Li Auto Stock
The current NEV market isn’t particularly strong. That’s been evidenced across the board in the first quarter of the year as EV and NEV companies broadly underperformed. However, long-term trends are almost certainly away from combustion engine vehicles and towards NEVs. This is reflected in Li Auto’s strong forecasted growth trajectory. With its earnings expected to grow at nearly 20% annually over the medium term, this company is one of the fastest growing in its sector.
I’m also buoyed by Li Auto’s decision to compete with Tesla on pricing. It’s a positive reflection of how far the company has come. It’s got a healthy cash buffer, it’s profit-making, and it’s got the existing margins to take on one of the biggest companies in the business.
