To The Moon

Summary

• Li Auto reported better-than-expected earnings for Q2, driven by strong demand for the company's EV products.

• The company saw triple-digit top-line growth and an increase in vehicle margins Q/Q, despite a price war in the EV market.

• Li Auto's impressive delivery outlook for Q3 supports the investment thesis, but risks include growing competition and a deteriorating pricing environment.

sefa ozel

Li Auto $Li Auto(LI)$ reported much better than expected earnings for its second-quarter, due to strong demand for the company's electric vehicle products and industry-leading delivery growth rates. As I indicated in my work Why I Have Doubled My Position Ahead Of Q2, the EV company is the fastest-growing EV company regarding deliveries in its industry group. Li Auto has outperformed its EV rivals in terms of delivery growth and share price performance, but the EV maker's valuation remains highly attractive. Given that Li Auto's share price has dropped after the EV company delivered solid Q2 earnings results and submitted a very strong outlook for Q3 deliveries (with Y/Y delivery growth rates approaching 300%), I believe investors are faced with a buy-the-dip situation.

Data by YCharts

Li Auto crushes expectations

Li Auto submitted a strong earnings card for the second-quarter last week which included a significant top line and earnings beat. Li Auto produced almost $4B in revenues in Q2, beating estimates by $174M. Adjusted EPS came in $0.16 per-share higher than expected at $0.36 per-share.

Source: Seeking Alpha

Strong execution leads to triple-digit top line growth and an expansion in vehicle margins

Li Auto, as I said multiple times in the past, is the fast-growing EV company and delivered triple digit top line growth in the second-quarter. In Q2'23, Li Auto generated 27.97B Chinese Yuan (US$3.9B) in vehicles revenues, showing a massive 230% year over year increase.

Li Auto does not only convince with strong top line and delivery growth rates, but also with this vehicle margins… which I believe could become more of a focal point of investor interest going forward. The reason for this is that Tesla $Tesla Motors(TSLA)$ ignited a price war in the electric vehicle industry earlier this year and many EV companies have lowered their prices to remain competitive.

For some companies, this has already led to lower vehicle margins and pressure on the bottom line. As an example, XPeng $XPeng Inc.(XPEV)$ disclosed negative vehicle margins in the first-quarter. On the other hand, strong demand for Li Auto's EV line-up has not resulted in a decline of its vehicle margins. To the contrary: Li Auto saw a 1.2 percentage point increase quarter over quarter in its vehicle margins in the June quarter: the EV start-up generated a vehicle margin of 21.0% on its EV products in the second-quarter... which could lead to Li Auto achieve its first-ever year of profitability this year.

Source: Li Auto

Impressive outlook for the third-quarter, delivery growth approaching 300% Y/Y

In my last work on Li Auto I projected that the EV maker would guide for 100,000-110,000 electric vehicle deliveries for the third quarter. Ultimately, Li Auto ended up guiding for 100,000-103,000 deliveries for Q3 which implies an impressive year over year growth rate of 277-288%. Li Auto therefore is likely to remain the fastest-growing EV company in the market in the second half of the year.

According to the company's revenue guidance, Li Auto expects $4.46-4.59B in revenues in Q3'23 which would calculate to a year over year growth rate of 246-256%. The outlook is impressive and further supports the investment thesis for Li Auto.

Li Auto: Buy the dip

Surprisingly, shares of Li Auto dropped after the company presented its second-quarter earnings card which creates a buying opportunity for investors that believe in the company's long term potential in the EV market. Considering that Li Auto is on track to achieve nearly 300% Y/Y delivery growth in the third-quarter, I believe the drop following the Q2 earnings card is totally undeserved.

Li Auto, following the post-earnings drop, is trading at a price-to-revenue ratio of 1.6X which is above the firm's longer term average P/S ratio of 1.21X. However, Li Auto has the same P/S ratio than NIO, although Li Auto is growing significantly faster: in July, NIO saw 104% delivery growth compared to a delivery growth rate of 227.5% for Li Auto. XPeng, which delivered negative delivery growth for July even has a higher valuation than Li Auto. In other words, Li Auto is executing better than its EV rivals, but having the cheapest valuation based off of forward revenues.

Data by YCharts

Risks with Li Auto

Vehicle margins are definitely a key metric that I would closely follow going forward, especially with competition in the EV market heating up and the pricing environment deteriorating as a whole. So far, Li Auto has managed to stay very competitive with its margins, but price cuts and slowing electric vehicle delivery growth would likely be two considerable headwinds for the EV maker's valuation going forward.

Closing thoughts

In my opinion, Li Auto is in a buy the dip situation after the release of second- quarter earnings and the share price drop has been wholly undeserved. Li Auto is executing extremely well and the company benefits from strong demand for its EV products. Li Auto's Q3'23 delivery outlook was extremely strong. What really convinced me to buy the post-earnings dip was that the company did not suffer a deterioration of its vehicle margins in the second-quarter despite a weakening pricing environment in the Chinese EV market. From a valuation (and delivery growth) perspective, I believe Li Auto constitutes the deepest value for EV investors!

Source: Seeking Alpha