To The Moon

The Chinese electric vehicle manufacturer is firing on all cylinders.

What happened

In June, when the stock markets crashed and the S&P 500 lost 8.4% in value, $Li Auto(LI)$ stock gained a jaw-dropping 52.8%, according to data provided by S&P Global Market Intelligence. The rally in Li Auto shares stuns even more when you realize that theelectric vehicle (EV) stockwas down 13.3% in the year through May.

What changed so dramatically for Li Auto, and is this rally even sustainable?

So what

The first day of any month often sets the tone for a Chinese EV stock's performance, as that's when these companies release their monthly sales data.

On June 1, Li Auto reported a 166% year-over-year jump in its Li One SUV sales. Deliveries rose 176% sequentially, confirming a rebound in manufacturing activity in China after EV manufacturers were forced to suspend or reduce operations amid COVID-19 lockdowns. Li Auto, though, had yet to resume full production as of June 1.

Those numbers also meant Li Auto grew faster in May than its EV start-up rivals. For context, XPeng's deliveries in May rose 78% year over year, while Nio reported only 4.7% growth in its May deliveries.

Later in the month, Li Auto unveiled a new six-seater SUV called the Li 9 at half the price of the luxury German SUVs GLS (from Mercedes-Benz) and X7 (from BMW), despite similar sizing. Citigroup analyst Jeff Chung was quick to give Li Auto stock a massive upgrade by raising its price target to $58.60 a share from $26.80 per share. Citi's new target represented a jump of almost 77% from Li Auto's previous day's closing price.

To be sure, Chung updated his rating on a bunch of EV stocks and not just Li Auto, as he remains bullish on EVs, particularly in China, and forecasts the "full lifecycle ownership cost" for EVs will drop by nearly 36% compared with traditional internal combustion vehicles even if prices of gasoline and lithium carbonate -- a key EV battery component -- rise by another 25% to 50% year over year into 2023.

Notably, among Li Auto, XPeng, and Nio, Chung upgraded Li Auto's price target by the biggest margin. And while he also upgraded XPeng, hecut his price target on Nio stock.

Li Auto is clearly emerging as a favorite EV stock among analysts and investors alike.

Now what

Li Auto is firing on all cylinders. It received more than 30,000 reservations for the Li 9 within three days of launch, which reflects strong demand for the company's vehicles. CEO Li Xiang is so confident about his company's standing in the Chinese EV market that he expects German automakers to slash their EV prices over the next couple of years as competition heats up.

In the meantime, demand for Li One remains as strong as ever -- the EV maker's deliveries jumped 69% in June. Li Auto delivered 28,687 units in the second quarter, exceeding its own estimate of 21,000 to 24,000 units by a big margin.

There could be one potential overhang in Li Auto's stock price in the coming months: a secondary offering of shares worth $2 billion. However, that should just be a near-term blip, as Li Auto expects to start deliveries of the Li 9 in August amid a reopening Chinese economy and expects to deliver 10,000 Li 9s in September alone. Those numbers could send Li Autostock even higher in the second half of 2022.