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?
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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 Doubles Year-Over-Year Deliveries
Li Auto’s October deliveries totaled 7,649 vehicles. That number is up from 7,096 last month and a 107% year-over-year increase. Global chip shortages have weighed on production outputs for automakers like Li. But that supply-chain kink seems to be easing. LI stock edged lower on the news.
China EV rivals also had strong October delivery numbers. The Warren Buffett-backed BYD Co. (BYDDF) reported October EV sales of 41,232. That number triples their year-over-year sales totals. Xpeng Motors (XPEV) delivered 10,138 vehicles in October, notching its second straight month of at least 10,000 deliveries. But Nio reported 3,667 deliveries in October, down 27.5% year over year, as a key production line was shut down for much of the month.
China Headlines Weigh On Li Auto Stock?
Although China stocks rebounded in October, Li Auto stock plunged 15% in the month of September amid continued negative headlines out of China. That marked Li stock’s third monthly loss in a row. However, Li clawed back some of those losses with a 24% gain in the month of October.
China EV stocks sold off especially hard 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 mid-September, regulators stated they would be reviewing China’s EV market. Industry and Information Technology Minister Xiao Yaqing stated the country had “too many” EV makers and would encourage consolidation.
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.
Li’s next report is due in mid-November.
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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.
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 66 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 33 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. 8 spot vs. its automotive industry peers. The automaker group is ranked a lofty No. 7 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, and the automotive group has improved from a near-worst ranking just months ago to join the top 10.
Li Auto Stock Technical Analysis
LI stock is working on multiple entry points. An early entry for investors would be a break in the current the trend line as Li Auto stock forms a handle. That level would with the 21-day line. Alternatively, investors could wait until LI stock hits a 34.93 handle buy point. But right now Li Auto stock is testing its 50-day line.
Li Auto stock was volatile from July to September due to uncertainty due to increased scrutiny by Chinese regulators. After a huge move off May lows, the stock began working on a long consolidation with a 36.76 buy point.
However, Li stock cleared a trend line within the consolidation in mid-October. The Oct. 14 and Oct. 15 moves higher came on above-average volume, with weekly trading activity picking up as Li Auto stock rebounded. Aggressive investors could buy Li Auto off its 50-day line as an early entry. Li stock is now forming a handle.
Meanwhile, Nio stock has rebounded above its 50-day line, though it remains below its 200-day line. Xpeng has rallied above its 50-day line and a trend line, flashing early entries. It’s now trying to clear a handle entry. BYD Co. (BYD), the EV and battery giant that easily outsells Li Auto, Xpeng and Nio combined, broke out on Oct. 18, pulled back sharply and is holding support at its 21-day line.
LI Stock: A Buy Right Now?
Li Auto stock has reclaimed key moving averages, with some signs of accumulation. As for fundamentals, Li Auto sales have seen strong growth over the last few quarters. Electric cars remain a compelling growth story.
Bottom line: Aggressive investors could eye a move above a trend line from LI stock’s recent handle pullback as entry point. That level would roughly coincide with the 21-day line. Or investors could wait to see if LI stock clears a handle buy point of 34.93. But 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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