As concerns about the global environment escalate, electric vehicles are facing multi-year tailwinds. China is leading the way in the transition to electric vehicles. Electric vehicles are predicted to account for three out of five new cars in China by 2030.
Without a doubt, it seems like a good time to stay invested electric vehicle companies. At the same time, it is important to be selective when considering exposure to electric vehicles. More than 400 companies are already active in the field of electric vehicles in China.
It goes without saying that there will be bankruptcies and consolidation of the sector in the coming years. One company that seems positioned to survive competition and growth at a healthy pace is Li Auto (AT THE).
In terms of stock price action, LI stock hit a low of $17.0 in May 2021 from an all-time high of $47.7. The correction was driven by valuation concerns related to electric vehicle inventories, especially at a time when the chip shortage impacted growth.
However, the correction appears to be over and LI shares have gradually risen to the current level of $30.7. Given the company’s growth trajectory, a further increase seems likely. (To see Li Auto Stock Charts on TipRanks)
Strong vehicle deliveries likely to continue
The sharp rally in LI stocks has been linked to strong fundamentals.
For the first quarter of 2021, the company reported delivery of 12,579 vehicles. Year-over-year this was 334.4% higher. Furthermore, vehicle deliveries for the second quarter of 2021 increased by 166.1% to 17,575 vehicles. It is clear that the growth has been enormous.
Looking deeper, there are two important points to note.
First and foremost, the company launched its first model, Li ONE, in November 2019. Growth has been robust, driven solely by one SUV model. Now the company is investing in the development of new vehicles. Once there is a broader portfolio of vehicles, it is likely that deliveries will increase further.
Furthermore, Li Auto reported having 65 stores as of March 2021. By the second quarter of 2021, the company’s stores had increased to 97 with presence in 64 cities. As the company expands its retail network, strong growth is likely to continue.
Robust revenue growth and cash flows
For Q1 2021, the company reported revenue of $545.7 million. Sales increased by 319.8% year-on-year. Given vehicle delivery numbers for the second quarter of 2021, strong sales growth is expected to continue.
However, there are other important upside catalysts for stocks. First, the company’s vehicle margin was 8.4% in the first quarter of 2020. The vehicle-level margin has increased to 16.9% as of the first quarter of 2021. As deliveries increase, the margin is likely to remain robust.
More importantly, Li Auto reported positive operating cash flow of $141.4 million for the first quarter of 2021, implying an annualized cash flow of $560 million. The company also reported free cash flow of $87 million for the quarter.
With revenue growth and margin expansion, Li Auto appears well positioned to deliver healthy free cash flows for years to come. This is important because the company can invest in growth through internal cash flows rather than through further dilution of equity.
It’s also worth noting that as of March 2021, Li Auto reported cash and equivalents of $4.6 billion. In addition, the company raised $862.5 million through a convertible senior bond offering in April 2021. The company appears to be fully funded for the next 12-24 months.
Wall Street’s Take
According to TipRanks analyst consensus rating, LI stock comes in as a strong buy with 5 buy ratings awarded in the last three months.
In terms of price targets, Li Auto’s average price target is $45.9 per share, which represents approximately 49.37% upside potential from current levels.
Currently, the company’s only model is a six-seat premium SUV. Given the cash buffer, Li Auto seems well positioned for new launches in the coming years.
With a strong cash buffer, focus on innovation and healthy cash flows, LI stock is worth considering at current levels.
Disclosure: Faisal Humayun had no positions (directly or indirectly) in the securities referred to in this article as of the date of publication.
Disclaimer: The information in this document is for informational purposes only. Nothing in this section should be construed as a solicitation to buy or sell securities.