To The Moon

Li Auto is too cheap to ignore

Li Auto’s EPS predictions imply that the market expects the company to achieve its first small profit in FY 2022… which means Li Auto is expected to reach profitability sooner than its rivals NIO and XPeng. NIO is expected to see its first profits in FY 2024 while XPeng is expected to turn a profit in FY 2025.

Based off of revenue predictions, Li Auto has a P-S ratio of 1.6 X which makes the EV company cheaper than NIO which has a P-S ratio of 2.2 X.

Risks with Li Auto

Li Auto has two main commercial risks: (1) The slowdown in delivery growth is set to impact the speed with which revenues are ramping up,(2) Vehicle margins for Li Auto have started to drop which indicates growing cost and margin pressures… in both cases this could translate to a lower valuation factor for Li Auto’s shares and additional losses for shareholders going forward. What would change my mind about Li Auto is if vehicle margins drastically contracted or the EV company submitted a weak forecast for FY 2023.

Final thoughts

Li Auto’s shares are too cheap to ignore. The electric vehicle manufacturer has seen a slowdown in deliveries this year through no fault of its own. Deliveries dropped off in August, but they should rebound as the company launches new products and production normalizes. Li Auto is expected to double its top line next year and although there is a growing risk of contracting vehicle margins due to inflation and cost pressures, I believe Li Auto has both an attractive valuation and a risk profile that remains skewed to the upside!