What happened
Shares of Chinese electric vehicle (EV) manufacturer Li Auto (LI +1.66%) went on a tear last year, nearly tripling in price between July and November -- but it has been all downhill since. On Thursday, the slide continued in the wake of the company's fourth-quarter earnings report. Its shares closed the trading session down by 9.8%.
But was the Q4 report really as bad as all that?
Image source: Getty Images.
So what
Li Auto grew its vehicle sales by 65% year over year in Q4, moving $622 million worth of metal, and its total sales of $635.5 million were up by a similar 65%. Problem was, the company earned slimmer gross margins on those sales, down 230 basis points sequentially to 17.5%. The company reported an operating loss of $12 million -- but a net profit of $16.5 million for the quarter.
Best of all, Li Auto says it generated $245 million in free cash flow.
For the year, sales totaled $1.45 billion, the company's operating loss was $103 million, and on the bottom line, the company suffered a net loss of $23 million. What I'd argue is the more important metric, though -- free cash flow -- was at $378 million for the year.
Now what
Li Auto predicts that in the first quarter of 2021, it will deliver between 10,500 and 11,500 vehicles -- close to a 300% increase over its Q1 2020 performance. Revenue growth should be similar -- somewhere between $450 million and $494 million equating to as much as 279% growth.
That sounds like good news to me. The problem with Li Auto, though, isn't its growth rate, but its valuation. Even valuing the stock on free cash flow (of which it has plenty) rather than net income (which it lacks), with a market capitalization of $23.2 billion, Li Auto is trading at a staggering 61 times its annual free cash flow. Granted, if the company succeeds in growing sales, earnings, and free cash flow at triple-digit-percentage rates for years on end, it could quickly grow into that valuation.
What worries me when considering a stock this new, though, is ... what if it can't?
