Should You Buy Li Auto Stock While It's 50% Below Its All-Time High?

Li Auto (NASDAQ: LI), a manufacturer of plug-in hybrid electric vehicles (PHEVs) and battery-powered electric vehicles (BEVs) in China, went public back in 2020. The stock rallied from its initial public offering price of $11.50 per ADS (American depositary share) to a record high of $46.65 in 2023.

But today, Li's stock trades about 50% below that peak, at around $23 per share. The stock retreated as growth in the EV market cooled off and rising interest rates drove investors toward more conservative investments. The decline was exacerbated by China's economic slowdown and the ongoing trade war between the U.S. and China.

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Image source: Li Auto.

However, Li also looks undervalued. Its enterprise value of 80.5 billion yuan ($11.1 billion) is less than its forecast sales for next year. So should you buy its stock before its near-term headwinds dissipate?

What sets Li Auto apart from other EV makers?

Li Auto started to deliver its first PHEVs in late 2019. It currently sells four plug-in hybrid SUV models (the L6, L7, L8, and L9) and its newer battery-powered Mega minivan. Here's how rapidly it ramped up its deliveries over the past five years.

Data source: Li Auto. YOY = Year-over-year. *Started deliveries in Dec. 2019.

Li set itself apart from its competitors in two ways. First, it initially focused on selling PHEVs instead of fully battery-powered electric EVs. PHEVs were often a more practical choice for people who only drove their vehicles within smaller areas, and they were also attractive for drivers who didn't want to rely entirely on EV chargers.

Second, Li built its own network of supercharging stations to support its vehicles. At the end of its latest quarter, it was operating a network of 894 supercharging stations with 4,286 charging stalls across China. It also operated 479 retail stores.

What are Li's strengths and weaknesses?

Li, like many other Chinese EV makers, is subsidized by the Chinese government. But unlike many of its peers, it turned profitable on a generally accepted accounting principles (GAAP) basis in 2023 as it scaled up its business. That sets it apart from currently unprofitable Chinese EV makers like Nio and Xpeng.

Unlike Nio, which is expanding into Europe, Li only sells its vehicles in China and doesn't have any overseas ambitions beyond some vague plans for the Middle East. Therefore, Li should face fewer tariff headwinds than those Chinese EV makers that want to expand into Western markets. However, it could still be affected by higher tariffs or export curbs on components or software from the U.S. and Europe.

Li's margins are also being squeezed by the EV price war in China. Its vehicle margin expanded from 16.4% in 2020 to 21.5% in 2023, but shrank year over year to 19.3%, 18.7%, and 20.9% in the first, second, and third quarters of 2024, respectively. It attributed those declines to a shift in its sales mix to a higher proportion of cheaper vehicles, which reduced its average selling prices.

Analysts expect Li to report an 18% rise in revenue for 2024, but they also estimate that its net income dropped by 35% as it ramped up production of its Mega minivan and navigated a tough pricing environment in China. But in 2025, they expect its revenue and net income will rise by 32% and 55%, respectively, as it laps those challenges.

Is it the right time to buy Li Auto stock?

Li Auto stock looks dirt-cheap right now, but it could continue trading at a discount as long as the EV market remains chilly, China's economic growth stays sluggish, and the trade tensions between the U.S. and China drive investors away from Chinese stocks.

If you expect those headwinds to gradually dissipate, then this could be a great time to buy Li's stock. But if you think those headwinds will worsen before they wane, then it might be smarter to stick with other undervalued growth stocks instead.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.