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Why Shares of Li Auto Fell in December

By Lou Whiteman - Jan 4, 2021 at 11:09AM

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The shares took a breather after a terrific run in 2020.

What happened

Shares of Chinese automaker Li Auto ( LI -15.95% ) fell 19.9% in December, according to data provided by S&P Global Market Intelligence, as investors began to have second thoughts about electric vehicle valuations. Li also increased the share count, selling into a rally to help boost its cash.

So what

It's been a great year for Li stock, which is up more than 150% in 2020 as of late November on investor enthusiasm about electric vehicles and the Chinese EV market in particular. Li makes an electric SUV with a gasoline-powered "range extender," a nice bit of insurance for consumers in rural parts of China where recharging infrastructure is still hard to find.

U.S. currency held in front of an electric vehicle charging port.

Image source: Getty Images.

Li still sells relatively few vehicles, but the potential Chinese market is enormous and the SUV segment is likely to be one of the larger and more lucrative parts of that market. Li currently trades for about 84 times revenue, and boasts a market capitalization of more than $25 billion.

Investors who had sent EV stocks charging higher throughout 2020 began to have second thoughts about those valuations in December, sending a range of stocks including Li's down for the month. On Dec. 4 Li filed to offer 47 million additional shares, looking to raise about $1.5 billion for continued research and development. That's likely a good long-term strategy for the business, but the added supply of shares tends to put pressure on the stock price.

Now what

Li shares had a good start to 2021, with the stock up more than 9% on Jan. 4 after the company reported strong December delivery numbers. The company delivered 6,126 vehicles in December, up 529% year over year.

This is a company that has both great potential and, arguably, a full valuation. The stock of late has been in a tug-of-war between those who are enthusiastic about the future promise, and those who are concerned about the current multiple. I'd expect that battle to continue in the quarters to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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