Can sales growth drive Li Auto up 86%?
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Shares of $Li Auto(LI)$ surged 30% last month after reporting strong 2023 earnings. Sales jumped 173.5% year over year, free cash flow increased to $6.2 billion, gross margins improved, and a turnaround was achieved with net income of $1.7 billion. But concerns that Li Auto's sales could slow in the first quarter of 2024 sent the stock tumbling later.
However, $Morgan Stanley(MS)$ is bullish on the Chinese electric vehicle stock,seeing the dip as a buying opportunity. According to the investment bank's forecast, Li Auto shares will rise to $74 in a year. If that prediction comes true, an investor who bought the stock at Tuesday's closing price would have achieved an 86% return.
Are Li Auto stocks worth buying?
Morgan Stanley's forecast sounds aggressive, but it's not unreasonable. From the valuation analysis, the current market value of Li Auto is $40 billion, free cash flow is $6.2 billion, and the market ratio is only 6.5.
By comparison, $Tesla Motors(TSLA)$ generated only about $4.3 billion in free cash flow last year, but has a market capitalization of $565 billion and a price-to-market ratio of 131.
Admittedly, Li Auto has predicted slower sales growth in 2024, but Tesla isn't immune to that either. Tesla told investors in January that its vehicle sales growth will likely be much slower than in 2023. So, the 90% expected sales growth rate of Li Auto in the first quarter is lower than the level of 2023, but it is still quite good.
It should also be noted that Li Auto only started generating revenue five years ago, compared to the 16 years Tesla has been generating revenue. Li Auto is a younger company and its growth curve is just beginning, which means the company has more room to grow over the next three to five years.
In a word, Li Auto is a value stock priced growth stock.
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