Better Chinese EV Stock: Nio vs. Li Auto

Nio (NIO -4.12%) and Li Auto (LI -8.07%) are both rapidly growing Chinese electric vehicle makers that took investors on wild rides following their public debuts.

Nio, which produces SUVs and sedans, went public at $6.26 per ADS in September 2018. Its stock hit an all-time high of $62.84 in February 2021, but it now trades at about $10. Li, which only produces SUVs, went public at $11.50 per ADS in July 2020. Its stock closed at a record high of $43.96 four months later, but it now trades at roughly $20.

Both stocks initially rallied during the buying frenzy in growth stocks throughout 2020 and 2021, but they lost their luster as rising interest rates curbed the market's appetite for speculative growth stocks. Should investors nibble on either of these volatile EV stocks as a turnaround play for 2023 and beyond?

Image source: Li Auto.

The key differences between Nio and Li Auto

Nio sells four types of SUVs (the ES8, ES6, EC6, and ES7) and two types of sedans (the ET5 and ET7). It also designed a high-end supercar called the E9 in 2016, but that vehicle was never mass produced. Li doesn't produce fully electric vehicles like Nio. Instead, it manufactures plug-in hybrid electric vehicles (PHEVs) that are partly powered by gas engines. Li currently sells two the L8 and L9 crossover SUVs. It discontinued its first vehicle, the Li One, in 2022.

Nio also built a network of battery swapping stations, which enable its drivers to quickly swap out their depleted batteries for fully charged ones for a monthly fee. Li has been building a traditional network of first-party supercharging stations, and it directs its drivers toward other third-party charging locations through its own digital map.

Which company has been growing faster?

Nio and Li aren't delivering as many vehicles per year as Tesla (TSLA -0.43%) yet, but they're certainly a lot more productive than smaller U.S. EV makers like Rivian (RIVN -1.11%) and Lucid (LCID). Nio delivered more vehicles than Li Auto back in 2020, but Li caught up and overtook Nio in annual deliveries by the end of 2022.

Data source: Company annual reports. YOY = Year-over-year. *Started deliveries in Dec. 2019.

Both automakers attributed their slower growth in deliveries in 2022 to COVID-19 disruptions, extreme weather conditions, and supply chain challenges. However, they both said the market's demand for vehicles remained robust, and expected their deliveries to stabilize over the long term as those headwinds dissipated and they rolled out new vehicles.

Nio's revenue rose 122% to 36.1 billion yuan ($5.7 billion) in 2021, while its vehicle margin expanded 740 basis points to 20.1%. Its adjusted net loss narrowed from 5.1 billion yuan to 3.0 billion yuan ($467 million). Nio hasn't posted its full-year earnings report, but analysts expect its revenue to rise 42% in 2022 and grow another 89% in 2023.

Li's revenue grew 186% to 27.0 billion yuan ($4.2 billion) in 2021. Its vehicle margin rose 420 basis points to 20.6%, and it posted an adjusted net profit of 780 million yuan ($122 million), compared to a net loss of 281 million yuan in 2020. Li also hasn't posted its full-year numbers yet, but analysts expect its revenue to rise 68% in 2022 and grow 106% in 2023.

We should take all those estimates with a grain of salt, but China's relaxation of its COVID restrictions might remove some of the biggest near-term obstacles for Nio and Li Auto.

In addition, a potential agreement between U.S. and Chinese securities regulators could prevent U.S.-listed Chinese stocks from being delisted and bring back some growth-oriented investors.

For now, both stocks look dirt cheap. Nio and Li trade at 1.1 times and 1.5 times their 2023 sales, respectively. Tesla, which lost nearly two thirds of its value over the past 12 months, still trades at 3.4 times its 2023 sales.

The winner: Li Auto

Nio might seem like a slightly better value than Li right now, but I believe Li's stronger growth, slightly higher vehicle margins, and higher profits make it a more compelling play on China's booming EV market.

Li probably won't garner much attention from investors until interest rates cool and investors develop a healthy appetite for speculative growth stocks again. But it might just be a hidden gem and a solid alternative to struggling U.S. EV makers like Lucid and Rivian.