Chinese electric car company Li Auto (LI +5.25%) released a powerful fourth-quarter earnings report on Monday, sending its shares flying nearly 19% by the closing bell, and giving a lift to the whole EV industry.
On Tuesday morning, Li Auto was maintaining its momentum, with three Wall Street analysts raising their price targets on the stock over the last 24 hours. As of 11 a.m. ET, Li stock was already up another 9.7%.
NASDAQ: LI
Key Data Points
What Wall Street is saying about Li
Tic-tac-toe, three in a row -- first Jefferies, then Barclays, then Bank of America raised their price targets on Li, saying the stock will rise to anywhere from $56 to more than $60 a share over the next 12 months. The high target suggests investors will book gains of more than 33% if they buy the stock today.
What's got Wall Street so excited about an EV stock that is not named Tesla? Well, there's the size of Li's earnings beat, for one thing. It was only expected to report about a $0.29 per share profit for Q4, but it actually reported $0.60 per share, and sales also exceeded expectations, nearly tripling year over year. In a note covered on TheFly.com, Barclays in particular was impressed to see that Li had managed to report strong gross profit margins on its sales despite fighting a fierce price war in China.
Of particular note, the Barclays analyst highlighted "reversal of warranty provisions." That gave a financial benefit to Li -- it didn't have to eat the costs of repairing cars for customers making warranty claims. But it's also a mark in the company's favor because it implies that Li's cars are of high enough quality that there were not many warranty claims in the first place.
Is Li Auto stock a buy?
Investors should still be cautious about this stock. Don't get me wrong -- at a valuation of 24 times earnings, and with revenues growing at well over 100%, Li Auto looks like a great growth stock prospect. And valued on its trailing free cash flow of $6.2 billion, the stock looks unbelievably cheap at less than 7 times FCF. Li's also swimming in cash, with about $12.5 billion more cash on its balance sheet than debt.
That being said, the EV price war in China will eventually begin to bite the company, and demand for EVs in China also looks like it could be slumping. Li management forecast that it would deliver no more than 103,000 EVs in Q1, a significant slowdown from the nearly 132,000 it shipped in Q4 2023. Just because Li is doing great today doesn't mean investors won't punish it for the wider trends in the EV space over the short term.
Personally, I have high confidence that this stock will be a long-term winner. But investors with shorter-term horizons should be aware that there's a risk that Li stock will be punished when the company's sales fall short in Q1.
