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Taking on Tesla: Inside Li Auto’s Giant Dream

Story Highlights

Li Auto has big plans to usurp the Chinese EV space from Tesla, Nio, and Xpeng.

Li Auto (LI) is miles behind Tesla (TSLA) in electric vehicle (EV) sales, but it has a giant dream, which, if attained, could set it apart as the best Chinese EV stock. Li Auto shares rose more than 2.8% to just above $38 on July 14.

Beijing-based Li Auto builds luxury electric cars. Alongside Nio (NIO) and Xpeng (XPEV), the company is taking on Elon Musk-led Tesla for control of the electric car market, initially in China.

Li Auto launched its second car model in June, yet Tesla, Nio, and Xpeng have had more car varieties on the market. Li Auto shipped about 60,000 cars in the first half of 2022, which pales in comparison to about 78,000 cars Tesla is estimated to have sold in China in June alone.

Li Auto’s Ambitions

The Chinese EV maker targets selling two million cars annually by 2025, according to a Bloomberg report. With its estimate of EV sales in China reaching 10 million by 2025, Li Auto is looking at taking 20% of the market. Getting there will require extraordinary effort, and Li Auto CEO Kevin Shen says they are determined to hit the lofty target.

Li Auto is aware it will not get there with two models or its current lone factory that can produce only about 100,000 cars a year. The company is working on building more car models and expanding its manufacturing capacity. On capacity expansion, Li Auto is gearing up to open two additional plants, according to the report.

Apart from the will to achieve the growth targets, running EV factories will require heavy capital. Musk recently described Tesla’s giant factories in Berlin and Austin as “money furnaces,” offering a peek into how running an EV facility can be expensive. Li Auto is looking to tap both the equity and debt markets to fund its lofty dream.

Li Auto’s Ploy to Tackle Chip Shortage

The global shortage of semiconductor chips has dealt the auto industry a heavy blow, forcing production halts and driving up component costs. Although the pressure has started to ease, Li Auto is trying to avoid running into similar problems in the future as that could derail its ambitions.

The company is talking directly with chipmakers such as STMicroelectronics (STM), Infineon Technologies (IFNNY), and NXP Semiconductors (NXPI) to secure supplies instead of going to distributors. STMicroelectronics plans to build a large chip factory in France with the support of the government to boost its capacity.

However, Li Auto’s ambitions could run into a strong headwind as the U.S. tries to isolate China in the race for control of the crucial chip industry. For example, the U.S. has sought to block ASML Holdings from selling its advanced chipmaking machines in China.

Wall Street is Strongly Bullish on LI

Consensus among analysts is a Strong Buy based on six Buys. The average Li Auto price forecast of $46.50 implies upside potential of 22% to current levels. Shares have gained about 18% year-to-date, at a time when stocks are mostly down across the board.

Li Auto’s Smart Score Shows Potential to Outperform

Li Auto scores a “Perfect 10” from TipRanks’ Smart Score rating system, indicating that the stock has strong potential to outperform market expectations.

Key Takeaway for Investors

The amount of work that Li Auto needs to do to achieve its EV sales target may make you doubt its ambitions. However, you would like to remember that few people believed in Tesla’s dreams from the start. The going got so tough for Tesla at some point that Musk considered selling off the company to Apple (AAPL), which was apparently not interested in owning the business.

The message is that while Li Auto may have an uphill task of selling two million cars annually, the market has mostly developed in its favor. China, Li Auto’s domestic market, is one of the world’s largest car markets. Moreover, electric car acceptance is only expanding as individuals and businesses look to cut carbon emissions to stem climate change.

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