Robert Way
Shares in Li Auto (NASDAQ:LI) have fallen more than 45% in the last year. The company manufactures and sells electric vehicles. Li Auto is a fast-growing, founder-led business that I think has potential. But there are major risks investors need to consider. From the current price, the company’s stock has the potential to even multiply. Overall, I think the company offers high risk and also high reward.
What Is Li Auto?
The company was founded in 2015 by Xiang Li, who is the CEO and owns 23.8% of the entire company. This is something that is good to see, as it is in his self-interest that the company will be successful in the long term. Its mission is: Create a Mobile Home, Create Happiness.
Li Auto is a Chinese manufacturer of electric vehicles. The company designs, develops, and manufactures its cars. The company has higher gross margins than its Chinese competitors. Li Auto currently has four cars. Li One, which was introduced at the end of 2019, Li 7, Li 8, and Li L9. Deliveries for the whole of 2021 amounted to 90,485 cars, an increase of 177.4% from 32,624 cars in 2020. That’s really fast growth. It is estimated that this rapid growth will continue in the future. The company currently has a leading position in the Chinese new-energy vehicle (NEV) market.
The company aims to maintain this leading position in the Chinese NEV market. According to global market research firm International Data Corporation (IDC), China’s NEV market will expand rapidly between 2022-2026. The country’s NEV market is estimated to reach 15.98 million units in 2026, with an annual growth rate of 35.1%, according to IDC. The market opportunity is huge for Li Auto.
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Li Auto & Growth
Li Auto has grown sales by hundreds of percent over the last few years. Very rapid growth is expected to continue in the future. In 2022, the company’s revenues are estimated to grow a whopping 56%. In 2023, analysts estimate that the company’s sales will grow by 102%. These expectations need to be taken with considerable reserve, as no one knows exactly what will happen. But you can see for yourself that the company’s growth is likely to be really fast over the next few years.
Now, I’d like to present you with a few strategies that the company will probably use for further growth. The first is to keep creating new models and thereby increase Li Auto’s offerings. This will be very much the focus of the company over the next few years, but it is important not to forget the quality of the cars. The company itself claims that the quality of cars is very important for customers. As I mentioned earlier, the company has a lot of competition, so it’s important that the company keeps making better cars. That’s the key thing to the company’s long-term success.
Li Auto, of course, will continue to focus on getting the company to sell more and more cars. This is what Li Auto will be trying to do with smart marketing, as well as making current customers happy with the car and recommending it to friends and family, thereby attracting other potential customers.
The next big opportunity for the company to grow is to expand internationally. This is something the company’s management plans to do. While the company is currently focused on the Chinese market, it definitely wants to expand abroad in the future. The opportunities for growth are really big for Li Auto.
What About The Financials?
Now let’s look at the financials of the company.
In the second quarter of the year, the company had $1.3 billion in sales. Gross margins had a company of 21.51%. Those are very high margins for a company that sells its manufactured cars. A lot higher gross margins than the ones of the competition. NIO (NIO), for example, had gross margins of just 13.02% in that same quarter. XPeng (XPEV) was even worse for that with gross margins of just 10.88%. That Li Auto has higher gross margins than the competition is definitely something you want to see as an investor.
The company is still losing money, and in this quarter it was a loss of $92 million in net income. The fact that the company keeps losing money is definitely something that investors need to keep in mind.
Now I’d like to introduce you to the strong balance sheet of the company. Li Auto currently has $7.528 billion in cash. That’s a big cash position indeed. More than half of the company’s current market cap. The company has $10.818 billion in total assets. The company currently has $1.2 billion in long-term debt, which is very low, considering how big a position it has in cash. Li Auto now has $4.452 billion in total liabilities. The company currently has a very strong balance sheet and if management wanted, tomorrow it could pay for all the liabilities of Li Auto and the company would still have $3.076 in cash. That’s a very strong balance sheet. In the last few quarters, the total liabilities of the company have grown at a fairly rapid pace, something investors need to keep a close eye on in the future.
The Valuation Is Cheap
The current valuation is cheap compared to the past. Li Auto’s stock has traded at an all-time low in the last few weeks. The current EV/Revenues is only 1.69x. That’s a lot less than a year ago. Price/Book is 2.5x. That’s definitely not a lot.
Analysts are expecting the company to turn profitable in late 2022 or in 2023. This will definitely be a very good event for the company, as in the current macroeconomic situation a lot of investors won’t even look at unprofitable companies. If Li Auto becomes profitable, that will bring a lot more attention to its stock. The current valuation is in my opinion cheap, but that does not mean that the stock is now a good buy, as the company has a lot of risks, which I will present to you further in this article.
There Are Some Major Risks
Now let’s focus on the risks Li Auto has. These are quite significant risks, and there is a big chance that Li Auto will go bankrupt if management doesn’t take the right steps for the company’s long-term success. That’s something investors need to keep in mind, but so far I think Li Auto’s management is doing a good job.
The first risk is competition. Li Auto has a lot of competition. The 2 main Chinese competitors the company currently has are the already mentioned NIO and XPeng. It is important to keep an eye on the fact that Li Auto is not lagging behind the competition and is constantly improving its vehicles. If this does not happen, there is a big risk that the competition will take over the customers of the company, which can be a big problem for Li Auto.
The current macroeconomic situation is not good almost anywhere in the world. China is no exception. The economy in China is generally slowing. This makes customers very careful with any purchase of cars, and they prefer to buy the cheapest cars possible. This is definitely not good for Li Auto, which sells luxury vehicles.
The geopolitical situation is another risk the company has. It’s not entirely predictable what the Chinese government decides to do and that poses a tremendous risk to the investor. These are the main 3 risks that I think Li Auto has and every investor should consider them carefully.
Conclusion
Li Auto is a fast-growing company trading at a historically low valuation. Management has done a good job over the last few years. However, there are a number of risks that I think every investor should consider carefully. The good thing, though, is that Li Auto has now a strong balance sheet.
If the management manages to beat the strong competition and the macroeconomic situation improves, shares can bring very attractive returns to long-term investors. But if that does not happen, or something else goes wrong, there is a big risk that the company will go bankrupt. That’s something every investor needs to keep in mind.
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