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Is Li Auto Stock a Buy?

By Rekha Khandelwal – Dec 13, 2021 at 8:55AM

Key Points

  • In November, Li Auto's vehicle deliveries rose 190% year over year.
  • The company's ICE-based range extender removes buyers' range anxiety.
  • The company should benefit from high domestic demand growth for electric vehicles.

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Li Auto is making a place for itself in the competitive China electric vehicle market.

When tallying up electric vehicle (EV) sales globally, China tops the list. In the first half of 2021, nearly 1.1 million EVs were sold in China -- more than 40% of the EV units sold worldwide during that period. Obviously, that has many leading automakers setting their sights on this fast-growing market. Li Auto (LI -1.46%) isn't necessarily a leader, but it has managed to gain a foothold in this competitive market.

In November, Li Auto sold 13,485 electric vehicles in China. That places it among the top 10 sellers of EVs in China. Other top players include BYD, Tesla, General Motors (joint venture with SAIC and Wuling), Xpeng (XPEV -2.46%), and Nio (NIO 0.48%). Li Auto's deliveries in November exceeded rival Nio's 10,705 units. By comparison, Xpeng sold 15,613 EVs during the month. 

The Li ONE electric vehicle is shown against an empty background.

Image source: Li Auto.

Notably, BYD sold more than 90,000 EVs (including plug-ins) in November, while the SAIC-GM-Wuling JV sold a little over 50,000 EVs. Completing the comparison, Tesla sold 31,732 EVs in China while exporting 21,127 EVs of the total 52,859 vehicles it delivered in China in November. 

Let's take a closer look at Li Auto to find if the company can compete and if its stock makes an attractive buy right now.

Li Auto's impressive growth

Li Auto (also sometimes referred to as Li Xiang or Ideal Cars) was founded in 2015 and started producing its first SUV, the Li ONE, in November 2019. So far, the company has delivered around 110,000 vehicles total. Of these, roughly 76,400 units have been delivered in 2021.

LI Revenue (Quarterly) Chart

LI Revenue (Quarterly) data by YCharts

In the third quarter, Li's revenue rose to $1.2 billion, up nearly 230% over the year-ago quarter. As the above graph shows, Li Auto's revenue growth in the third quarter was higher than that of its peers Xpeng and Nio. Li's growth momentum sustained itself in October and November, as evident by the company's latest delivery numbers. In November, Li Auto's vehicle deliveries rose 190% year over year. The company is clearly growing in a market with aggressive competition. Moreover, Li Auto's gross profit margin of 23.3% was higher than its peers in the latest quarter.

What differentiates Li Auto from rivals

Li ONE might more accurately be referred to as a hybrid EV because it uses an internal combustion engine-based "range-extender," which (like plug-ins) allows refueling in the absence of an electric charger. Also, unlike most plug-ins, Li ONE can be charged using fast chargers. This optionality is likely a key reason for Li's exceptional growth. Unlike in the U.S., EV owners rely more on public chargers in China due to the limited availability of residential parking spaces suitable for installing home chargers. Using slow public chargers isn't always possible (or optimal), resulting in range anxiety. Li's range-extender offers a solution to that anxiety. 

To be fair, although Li ONE's range-extension technology is getting a good response from consumers right now, that may change as battery electric vehicles with longer ranges become more commonplace.

Growth plans

In the fourth quarter, Li Auto expects to sell 30,000 to 32,000 vehicles, representing more than 100% year-over-year growth. The company's manufacturing facility in Changzhou has an annual production capacity of 100,000 units, expandable to 200,000 units. 

In October, Li Auto commenced construction of a new manufacturing facility in Beijing. It is expected to become operational in 2023. 

Li Auto plans to launch a full-size extended-range SUV in 2022. In the future, it plans to launch more models of extended range as well as fully electric vehicles. 

A promising electric vehicle stock

Li Auto stock is trading at a lower forward price-to-sales ratio than that of Xpeng and Nio.

LI PS Ratio (Forward) Chart

LI PS Ratio (Forward) data by YCharts

The company grew its sales at a higher rate than peers recently. At the same time, it reported higher gross margins. Though Li Auto's operational history is short, its growth so far looks promising.

In the long run, Li Auto should benefit from a strong domestic demand growth for EVs. Overall, Li Auto stock looks promising. However, investors should note the risks due to its relatively short history of operations as well as intense competition from more established electric vehicle companies.

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool owns and recommends BYD, NIO Inc., and Tesla. The Motley Fool has a disclosure policy.

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