In September 2023, I shared a bullish thesis on Li Auto (LI), but the stock’s subsequent 34% decline calls for a reassessment.
The price decline appears unrelated to the company’s fundamentals, which show robust delivery growth, enabling economies of scale and expanding profitability. News of LI’s entry into a price war with Tesla (TSLA) was met with market pessimism, causing an almost 10% drop in stock price.
Why I Believe the Price War Is Strategic:
Despite the stock’s tumble, I see the price war as a strategic move.
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Strong Balance Sheet
: LI has a $14 billion cash pile, minimal leverage, and solid liquidity, allowing it to withstand a temporary profitability dip.*
Economies of Scale
: The company’s 182% YoY delivery growth in 2023 has expanded its operating margin significantly.*
Growth Outpacing Market
: LI’s Q1 delivery growth (52.9%) exceeded the overall Chinese EV market’s 31% growth, indicating expanding market share.*
Delivery Prioritization
: Discounts of around 5% on vehicles will support continued delivery growth. The launch of the Li L6 model in April is also expected to boost sales.Valuation Update:
LI’s valuation remains moderate despite a 7% price increase over the past year and a 30% YTD decline.
Using a discounted cash flow (DCF) simulation with conservative assumptions, I estimate a fair value of $137 billion, implying a 5.2x undervaluation and a target price of $130 per share.
Risks to Consider:
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China-Related Risks
: LI operates and manufactures in China, subjecting investors to political, geopolitical, and delisting risks.*
EV Industry Sentiment
: Tesla’s recent decline has negatively impacted the sentiment around EV stocks, which could affect LI’s price.Conclusion:
The recent price dip presents an opportunity to acquire LI shares at a compelling price. While the price war may temporarily impact profitability, I believe the company’s long-term potential is intact. The attractive valuation makes Li Auto a ‘Strong Buy’ recommendation.
