To The Moon

Li Auto $Li Auto(LI)$  is an electric vehicle (EV) maker in China. I am neutral on the stock.

When a company buys back its own stock, that’s typically a good sign. It often means that the company is confident in its own future – something that executives might claim in press releases and conference calls, but as the old saying goes, “Put your money where your mouth is.”

What’s the opposite of self-confidence, then? Perhaps it’s self-pessimism, and when a company divests large blocks of its own stock shares, this could signal major issues. Questions might be raised: Does the company’s management detect problems that they’re not disclosing to the public? If they’re enacting large-scale share sales, why should investors stay on the long side of the trade?

There are no easy answers here, but these questions seem to apply to Chinese automaker Li Auto. It’s confusing because the company seems to have so much going for it. Besides, there’s positive news for Chinese stocks in general, so the mood should be overwhelmingly positive – yet, the sour mood surrounding Li Auto stock indicates that wise traders are keeping their distance for now.

On TipRanks, LI scores a 10 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to outperform the broader market.

An Auspicious Start to the Summer

By all indications, Li Auto should be thriving as a business. There may be a shortage of tech components, but there’s no shortage of early-summer positive news developments for Li Auto.

For example, Li Auto’s May delivery update offers plenty of fodder for the bulls. That month, Li Auto shifted into high gear as the company delivered 11,496 Li ONE model SUVs. That’s pretty impressive for a relatively small automaker, and it’s just for one month. Furthermore, on a year-over-year basis, this result represents a 165.9% improvement.

This isn’t to suggest that Li Auto is operating problem-free. Li Auto co-founder and President, Yanan Shen, acknowledged that his company’s Changzhou manufacturing base “has not yet reverted to its normal production level, resulting in delayed deliveries for some of our users.” Whether this is bullish or bearish for the company, is up to you to decide. Still, delivering 11,496 Li ONEs in May 2022 is quite a feat, considering the challenging circumstances.

More good news arrived when Li Auto unveiled its six-seat, full-size flagship SUV called Li L9, a week ago. This vehicle looks amazing, and can accelerate from zero to 100 kilometers per hour in 5.3 seconds. Moreover, the Li L9 features a lithium battery with a “longer driving range under EV mode of a CLTC range of 215 kilometers and a WLTC range of 180 kilometers” – not too shabby.

To top it all off, Li Auto recently revealed that it had taken in over 30,000 orders for the Li L9. Believe it or not, this milestone was reached in just 72 hours since the Li L9 became available for reservations.

Rules are Eased, but Shares are Sold

What is surprising, is that Li Auto stock took a 6% nosedive even while China’s major indexes were up.

What could possibly dampen the mood of Li Auto stock traders? Most likely, it’s the company’s announcement that it has filed a prospectus supplement to sell up to $2 billion worth of Li Auto American depositary shares through an at-the-market equity offering program.

As of Monday’s closing stock price, this dollar figure represented nearly 5% of Li Auto’s market cap. In other words, Li Auto is selling a whole lot of its stock shares. First, this is potentially problematic as it could raise share dilution issues. Second, as already discussed, it’s not necessarily encouraging when a company is a large-scale seller instead of a buyer of its own stock shares.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, LI is a Strong Buy, based on six unanimous Buy ratings. The averageLi Auto price targetis $46.60, implying 25.71% upside potential.

The Takeaway

Li Auto’s at-the-market equity offering program isn’t the end of the road for the company. However, it’s clearly a cause for concern, and the investing community doesn’t seem pleased with Li Auto’s mega-size share sale.

Granted, there’s also positive news to observe, both for China’s macro environment and for Li Auto in particular. Nevertheless, cautious investors should consider holding off on trading Li Auto stock as the company’s gigantic share sale might be a sign of deeper problems that haven’t been uncovered yet.