Upstart Chinese automaker Li Auto (LI 2.24%) on Thursday cut its deliveries estimate for the first quarter, acknowledging in a statement that the ramp-up plan for its first fully electric vehicle (EV), the Li Mega, might have been too optimistic.
Wall Street responded quickly. Analysts at Barclays and Citi both cut their price targets for Li's stock on Friday. Is it time for shareholders to be concerned?
Why Li Auto cut its deliveries guidance so close to the quarter's end
Li Auto on Thursday said that it now expects its vehicle deliveries for the first quarter to fall between 76,000 and 78,000 vehicles. That was a significant cut, as just a few weeks ago, Li had told investors to expect it to deliver between 100,000 and 103,000 vehicles in the quarter. But it had overestimated early demand for its new Mega, the company's first purely electric vehicle, launched on March 1.
The Li Mega is the company's first purely electric vehicle, launched on March 1. Image source: Li Auto.
Until the launch of the Mega, Li had focused solely on so-called "extended range electric vehicles," or EREVs. These are essentially electric vehicles with small batteries and gasoline engines that act as on-board generators. Li's EREVs initially became popular in areas of China outside of major cities where charging stations were harder to find, and the company's reputation was built from there.
CEO Xiang Li said in a statement that he and his team had thought demand for the all-electric Mega would be similar to that of Li's EREVs right away. The company now realizes that it needs to prove the new model with its core customers before scaling up, he said.
Wall Street's response to Li Auto's guidance cut
Investors took the guidance cut about as well as you'd expect: The stock closed down about 7.5% on Thursday. But two Wall Street analyst notes on Friday argued for a more measured response.
In its Friday morning note, Barclays lowered its price target on Li Auto to $39 from $56. That's still an upside of about 27% from current levels, but it reflects lower sales and revenue expectations in the near term, the analysts wrote. The analysts praised Li's execution to date and maintained the bank's buy rating on the stock, characterizing the softer-than-expected sales of the Mega, which launched on March 1, as a rare misstep.
Citi also cut its price target on Li's shares on Friday, though not by quite as much, from $57.30 to $48.50, still a roughly 58% upside from here. Citi's analysts also cut their estimates for Li through 2026 to incorporate the reduced-sales guidance. And while they maintained a buy rating, they said that negative investor sentiment around the company's near-term prospects is unlikely to lift if sales don't bounce back in April.
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How to think about this change to Li's sales guidance
Li Auto isn't the only Chinese EV maker concerned about soft near-term demand. Rival XPeng said earlier this week that it also expects a sluggish first, and Bloomberg News reported on Friday that Tesla has reduced production at its Shanghai plant due to slowing demand.
China's auto market, or at least its market for electric cars, may well be softening. If so, then revenue and profit margins at all of the automakers in the space will likely slip for a while. That's likely to drive those automakers' stocks down in the near term, but holding on to companies with the best execution -- and Li's has been very good -- is still likely to pay off over time.
