Stocks to buy

As with most stocks, the “story” with Li Auto (NASDAQ:LI) is far from perfect. As I’ve argued in past coverage of LI stock, there is one major concern with this Chinese electric vehicle manufacturer.

At present, this risk is hindering the stock’s performance. It also underscores that it’s best to think twice before backing up the truck with this name, That said, don’t assume that LI is a “no-go” situation.

If you’re looking to make a calculated wager on the proliferation of EVs in China (the world’s largest EV market), LI continues to be one of your best bet among U.S.-listed Chinese vehicle electrification plays.

At least, that’s the takeaway, with the latest information available about the company. With metrics such as growth and profitability, the company continues to leave many of its peers in the dust.

LI Li Auto $29.45

A ‘Semi-Wait and See’ Situation

Sure, on the surface, Li Auto doesn’t seem to sport a discounted valuation. Based on sell-side consensus forecasts for 2023 earnings (64 cents per share), the stock trades at a price-to-earnings (or P/E) multiple of 45.4. Not exactly value stock territory.

Still, considering that forecasts call for this company’s earnings to rise by more than 70% in 2024, following another big jump in sales, it wouldn’t be all that unreasonable for the market to price LI stock at an even higher multiple. Perhaps, with this level of growth, Li deserves a valuation closer to that of the leading global name in the space, Tesla (NASDAQ:TSLA).

At current prices, TSLA trades for more than 58 times forward earnings. So, why doesn’t LI trade at an even more premium valuation? Like I hinted at above, it all has to do with a key risk with this company: falling margins.

The market may be bullish about Li’s sales growth potential, but unlike with Tesla, they are less sold on the prospect of Li turning this high sales growth into heavy earnings growth. In short, pricey but not fully priced, this is a ‘semi-wait and see” situation.

The Silver Lining

Admittedly, the aforementioned “situation” with LI stock hasn’t stopped shares from delivering a solid performance in 2023. Year-to-date, this EV play is up by nearly 38.5%. However, don’t take this performance to mean that, if you’ve yet to entered a position, you have “missed the boat.”

Shares have bolted higher over the past few months, because of some (but not all) of the “semi-wait and see” uncertainty clearing up.

For instance, Li keeps crushing it, in vehicle deliveries growth. During May, Li delivered a total of 28,277 vehicles, up 146% year-over-year (YoY), and up by double-digit on a sequential (month-over-month-basis).

In terms of earnings, the company also continues to win back the market’s enthusiasm. For the preceding quarter, although there was margin compression, non-GAAP net income nearly tripled YoY, and rose 46.1% sequentially. Li’s earnings for the quarter came in well ahead of analyst consensus.

Guidance for the coming quarters was also very promising. That’s where the silver lining comes in. If Li keeps trouncing expectations, with both sales growth and earnings growth, a further “clearing of uncertainty” could transpire, keeping the stock on an upward trajectory.

The Most Important Takeaway

Potential upside with LI (at around $29 per share) may go beyond shares merely re-hitting their past high-water mark (over $40 per share). The continued adoption of EVs in China points to even more runway.

Yes, Li is not the only company with this mega-trend in its corner. Other U.S.-listed Chinese EV makers, like Nio (NYSE:NIO) and Xpeng (NYSE:XPEV) also have it on their side. However, while NIO and XPEV have mostly just “talked the talk,” LI has, without question, “walked the walk.”

Perhaps hitting the sweet spot by focusing on electric SUVs for the mass affluent market, Li has been, and appears poised to continue being, adept at turning this trend into tangible strong fiscal performance.

With this, LI stock remains a much stronger vehicle for gaining exposure to the continued rise of EVs in China.

LI stock earns a B rating in Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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