Hidden Opportunities in Li Auto’s Tough Quarter You Can’t Miss

Key Points

• Li Auto shares have plummeted by 54% in the last year, though the company has outperformed rivals like Xpeng and Nio.
• An intense price war, a weak economy, tepid consumer spending, and more have battered the Chinese EV maker.
• Still, as a rare profitable EV maker with margins that beat out many peers, Li has strong fundamentals.

Just months ago, Chinese electric vehicle (EV) manufacturer Li Auto Inc. NASDAQ: LI stood out among competitors like Xpeng Inc. NYSE: XPEV and Nio Inc. NYSE: NIO as a rare profitable maker of new energy vehicles with a stock price that reflected its dominance at over $46 per share in late February. Its leadership in the premium SUV space and focus on production and marketing efficiency with a small number of models contributed to the longevity of Li's share price success, even as rival EV maker stocks floundered.

Fast forward to late August, and Li's stock price has plummeted as well, though with a decline of 54% in the last year it has fallen slightly less far than Xpeng (59%) and Nio (64%). That said, analysts are optimistic about Li's prospects over the longer term, as an average price target of $36.36 implies an upside potential of more than 84%.

Unfortunately for Li, its earnings report from this week did not immediately fuel a reversal of its share price decline over recent months. Instead, Li shares fell about 18% from market close on August 27th through morning trading on the 28th. Nonetheless, Li's position within the competitive EV space remains strong, even as a number of external factors have negatively impacted performance.

Li Auto’s Growth and Profitability: How It Stacks Up Against Xpeng and Nio

Bright spots in Li Auto's second-quarter earnings report include its vehicle deliveries, overall profitability, and vehicle margin, all of which remain dominant within the industry.

Li's vehicles are broadly popular, a fact that is reflected in its 25.5% year-over-year increase in total vehicle deliveries. The firm delivered over 108,000 vehicles during the quarter and maintained nearly 500 retail stores in China. Li's positioning within the Chinese EV space is still dominant: in their most recent reports, both Xpeng and Nio each announced quarterly deliveries of roughly 30,000.

Significantly, Li Auto remains profitable despite its net income of about $151 million for the most recent quarter, which represents a more than 52% year-over-year decline. Xpeng and Nio reported net losses of about $180 million and $718 million, respectively, in their latest earnings filings.

Li also beats its rivals in vehicle margin, a measure of the gross profit or loss from the sale of vehicles as a percentage of vehicle sales revenue. Li Auto's vehicle margin was 18.7%, down from 21% in the prior-year quarter but still well ahead of Xpeng (6.4%) and Nio (9.2%). Li also remains ahead of these competitors in gross margin, although Xpeng is not far behind.

Navigating Challenges: How Li Auto Is Adapting to China’s Price War

One reason for the erosion of Li's vehicle margin and net income is the intense price war that has developed among EV makers in China. With dozens of companies of various sizes competing, there is a significant incentive to offer discounts on EVs in order to stand out. Li is among the best-established of these firms but still takes many of its pricing cues from leader BYD—when BYD adjusts its prices, most other EV firms follow suit. Another reason discounts have become increasingly important is that EV penetration in mainland China has surpassed 50%. Companies may be finding that they have to offer increasingly competitive deals to continue appealing to new customers.

Another external factor negatively impacting Li Auto is the overall state of the Chinese economy. Even following the country's intense COVID-related lockdown period, China's GDP has been slow to grow. In addition to that, with an ongoing housing crisis and tepid consumer spending, the makers of niche EV vehicles are in a difficult position.

The combination of heightened competition in a still stabilizing market and weakened consumer appetite means that overall demand for Li's products—though still climbing—is likely not as robust as it would be otherwise.

Investors see Li's launching of its Li Mega model as a bid to fuel demand. This fully electric minivan stands out from Li's other vehicles, which generally have a larger driving range thanks to being partially powered by gasoline. With the most recent quarter the first to reflect Mega sales, an 8.4% year-over-year increase in total sales suggests the rollout of the Mega was not yet a major success.

When Conditions Are Right, Li Could Shine

Despite the lackluster stock performance, Li has a number of positive intrinsic qualities: its profitability, unique product lineup, and comparably strong margins speak to the strength of its business. Investors may want to be on the lookout for changes in the broader economic or EV landscapes in case they create an opportunity for Li Auto to shine.