It’s been tough lately for Chinese electric vehicle stocks, including for Li Auto (NASDAQ:LI) stock. Besides the fact that overall market sentiment has turned negative in recent months, investors have really soured on Chinese EV companies particularly. This is due to the many challenges currently playing out in what is the world’s largest EV market.
Yet despite the many near-term headwinds, long-term prospects remain bright for the Chinese EV industry. This may warrant going against the grain and loading up on high-quality, attractively-priced names in this industry, ahead of an eventual recovery.
There are many Chinese EV manufacturers with U.S. stock market listings, but Li Auto may be the only one that offers the winning combination of strong growth potential and a low valuation.
These two factors give it the strongest upside potential, which helps to outweigh the high risk that comes with investing in this space.
| LI | Li Auto | $20.84 |
Macro Uncertainties and Li Stock Opportunities
Just like the U.S. economy, the Chinese economy is also experiencing many headwinds. China is currently experiencing a sharp slowdown in economic growth.
As I mentioned in my last article on LI stock, China is also facing other challenges, like continued Covid-19 lockdowns, as well as rising tensions with the U.S. government. The Covid-19 lockdowns in particular have worsened supply chain bottlenecks, limiting EV production. Last month, Li Auto lowered its third-quarter delivery outlook, citing this factor.
Due to these macro uncertainties, Li Auto shares have tumbled in recent months. Since hitting prices nearing $41.50 per share in June, the stock is down more than 42%. Admittedly, this isn’t the most dramatic drop among Chinese EV stocks. Shares in XPeng (NYSE:XPEV), one of Li’s peers, have lost more than two-thirds of their value during this timeframe.
Early-stage Chinese EV plays have experienced even sharper declines. For instance, Zhejiang Leapmotor Technology, which went public late last month on the Hong Kong Stock Exchange, fell 33.5% on its first day of trading. Yet while LI hasn’t experienced the most dramatic tumble, this pullback has made it a more compelling buy compared to its peers.
Li Auto vs. Other Major EV Stocks
With China EV stocks overall out of favor, you may be wondering why LI stock in particular is the better buy for bottom-fishers. In terms of valuation, Li Auto is technically not the cheapest.
Using the forward enterprise value to sales (or EV/Sales) metric, XPEV trades at a far lower valuation (1.3 times forward sales) than LI (2.65). However, as I put it late last month, XPeng’s deliveries and financials have been problematic. This justifies a lower valuation.
In contrast, Li has been resilient despite the challenges. The company’s September deliveries were up 62.5% year-over-year. Recent developments, like the earlier-than-expected launch of its Li L8 six-seat electric SUV, point to similarly-solid delivery numbers in the months ahead.
Yes, many analysts and investors believe Nio (NYSE:NIO) will also report strong deliveries this quarter. Yet NIO, despite trading at a valuation premium (EV/Sales ratio of 3.04), reported tepid year-over-year deliveries growth last month (2.35%).
Furthermore, as seen from analyst earnings forecasts, LI is expected to report positive earnings per share (or EPS) in 2022 and 2023. NIO, on the other hand, is expected to report negative EPS this year and the next.
The Verdict on LI Stock
Compared to its most widely-known peers, this Chinese EV stock stands out. Xpeng trades at a lower valuation but has more uncertain prospects. There’s a lot of buzz around Nio, yet this excitement has resulted in a higher valuation, despite less impressive delivery numbers, and a long road to profitability.
Put simply, Li Auto offers growth potential at a favorable price. Even if macro challenges in China continue between now and the end of 2022, the company could continue to report delivery numbers that are impressive in light of the headwinds.
Once macro challenges resolve and a shift in market sentiment results in renewed appreciation of its long-term growth prospects, LI stock could rebound. If you’re bullish on EV proliferation in China, buying this stock is arguably the best way to play this trend.
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.