What happened

Shares of Li Auto (LI -9.60%) slumped Friday morning and were trading down 8.4% by noon ET. Just a couple of days ago, Bank of America analyst Ming Hsun Lee upped the Chinese electric vehicle (EV) stock's price target to $27.60 per share in anticipation of a strong outlook for the fourth quarter, among other things.

Turns out, Li Auto did guide for a strong uptick in deliveries for the fourth quarter this morning, but lower-than-expected revenue and earnings and a sharp drop in gross margin have triggered panic-selling in the EV stock. 

The fears, however, may be overdone.

So what

Li Auto's Q3 sales of $1.3 billion missed consensus estimates, although its revenue grew 20% year over year. The EV maker lost $231.3 million in the quarter, with its gross margin almost slashed in half to only 12.7%. This is the lowest gross margin Li Auto has seen in more than two years.

Management blamed a "provision" related to Li One for the dramatic drop in the company's gross margin. Li One is Li Auto's first model that the company is now phasing out to make way for its new SUVs, Li L8 and Li L7, which were launched in September. The EV maker has been doling out big discounts and incentives to clear out Li One inventory, and that hurt its margins.

Now what

Now that you know why Li Auto's margins fell in the third quarter, it's reasonable to expect its margins to normalize in the fourth quarter.

Further, Li Auto expects to deliver 45,000 to 48,000 EVs in the fourth quarter. While that would mean a more than 30% year-over-year growth, it's also a substantially big sequential jump -- Li Auto delivered only 26,524 EVs in Q3.

As for revenue, Li Auto sees its top line growing by 55% to 65% in the fourth quarter. Right now, Li Auto is delivering two cars, Li L8 and Li L9, and should begin deliveries of Li L7 early next year. The company also has another SUV, Li L6, lined up for deliveries next year.

If Li Auto can scale up production of Li L8 and Li L9 in the fourth quarter and meet its delivery target, it could pave the way for a strong 2023 for the EV maker.