The LI stock analysis shows a rare EV company that generates significant free cash flow
In my Li Auto (NASDAQ:LI) stock analysis, I noticed that the company has outperformed every one of its U.S.-listed Chinese EV peers over the past year. That includes Tesla (NASDAQ:TSLA), down more than 2% over the past 52 weeks compared to a 45% gain for Li.
What’s the company’s secret? The past year has been a bloodbath for EV stocks, yet Li has avoided the carnage. To figure this out, I’ll look at several attributes and data points for the company, hoping to find something that explains why LI stock didn’t go to the dogs in 2023. And, more importantly, why it might stay ahead of the crowd in 2024. Here’s my two cents.
Is Li Auto on the Hunt for Acquisitions?
I recently wrote about the Chinese government’s desire to do away with mindless EV expansion. Fortune reported that it doesn’t like all of these 300 domestic EV makers boosting capacity at a time when demand for EVs is anything but robust.
Well, Li Auto founder and CEO Li Xiang publicly stated that the Chinese government needs to set up an M&A mechanism so that many of these barely solvent manufacturers can be efficiently combined into larger, more prosperous businesses.
“In the future, many new brands will encounter operational and financial problems as a result of competition,” Bloomberg reported Li’s comments on China’s X-like Weibo. “If social loss caused by mergers and acquisition is 10, that by bankruptcies is 100.”
He likens what should happen to the history of consolidation in the U.S. auto industry. At the turn of the 19th century, 30 companies made a small amount of cars in America. By the time Henry Ford brought out the Model T in 1908, more than 500 companies were duking it out.
Today, there are the Big Three in Detroit and a few domestic EV manufacturers, such as Rivian Automotive (NASDAQ:RIVN) and Lucid Group (NASDAQ:LCID).
The same thing happened in the beer industry. In 1870, there were more than 3,286 breweries in the U.S. By 1915, there were just 1,345. Prohibition hit, reducing the number to 684 in 1940. By 1980, it was down to less than 90. A craft beer resurgence began shortly after that.
Many of these smaller EV firms are getting in the way of Li Auto dominating the domestic market, but BYD is the dominant player in the EV market in China, doing better than even Tesla.
So, is Li Auto’s CEO saying these things because he’s a solid citizen? Or because of self-interest? Could Li Auto be in the market for a few Chinese EV brands?
As I said in the intro, I’ve not followed LI stock closely. I’m just spitballing about the reasons for the comments.
The LI Stock Analysis
Of the 40 analysts that cover its stock, 36 rate it a Buy, with a $52.30 target price, 49% higher than its current share price.
An example of the love paid by analysts for LI stock was Goldman Sachs’ Tina Hou, who initiated coverage of Li Auto in early January with a Buy rating and a $52.90 target price.
“We expect the competitive positioning of BEV [battery electric vehicle] models and deepening sales network to drive another leg of growth for Li Auto,” Benzinga reported Hou’s comments.
Interestingly, and probably something most Li Auto followers know, it has a gas tank in its EVs to charge the batteries. That is an interesting innovation. The analyst also said it is among the few Chinese EV companies that make money.
Its Q3 2023 net income was 3.47 billion Chinese yuan ($482 million), good for a 10.3% net margin. Even more impressive, its non-GAAP free cash flow was 13.22 billion Chinese yuan ($1.84 billion).
Because of its growing profitability, its current valuation is very reasonable, at 2.21x sales and 5.75x cash flow.
It’s hard to argue with the analyst’s love when you’re delivering the goods. I’ll have to pay more attention to Li Auto from now on.
Given its valuation, I don’t see why this isn’t on your watchlist if you’re not anti-China. It’s neck and neck with BYD for best EV stock in China.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.