Li Auto's Stock Drop: What's Behind the Fall Despite Record Deliveries?

Headlines

• Li Auto has seen a significant increase in vehicle deliveries, especially for its new Li L6 model.
• Despite this growth, the company's stock has fallen 35% due to international tariffs and a cooling Chinese economy.
• The Chinese EV market remains promising with new incentives and premiumization trends.

The Chinese luxury electric vehicle market is experiencing a period of significant change, with Li Auto (NASDAQ:LI) at the forefront. In July 2024, Li Auto delivered 51,000 vehicles, marking a substantial 49.4% increase compared to the same period last year. This impressive growth can be attributed to a few key factors.

Firstly, Li Auto has seen strong demand for its newly launched, more affordable Li L6 model. Introduced in April and priced at approximately RMB 250,000 (around $34,500), the Li L6 sold over 20,000 units in July alone. The company also made strategic price reductions across several of its models earlier this year, which has likely bolstered overall sales volumes. However, while the Li L6's popularity has surged, other models like the Li L7, Li L8, and Li L9 have experienced a slowdown in growth, potentially affecting the company's average selling prices.

Despite these positive delivery numbers, Li Auto's stock has plummeted by 35%, dropping from $30 in early January 2021 to around $20. This decline contrasts sharply with the S&P 500, which has risen by approximately 45% over the same period. Several external factors have contributed to this downturn. In May, the U.S. imposed a 100% tariff on Chinese EV imports, and in June, the European Union increased import duties on Chinese EVs. These measures could impede Li Auto's plans for international expansion. Additionally, China's economic growth has slowed, with GDP rising by a lower-than-expected 4.7% in the second quarter, and consumer spending has also decreased.

The stock's performance over the past few years has been inconsistent. Li Auto saw returns of 11% in 2021, a sharp decline of 36% in 2022, and a significant rebound of 83% in 2023. In comparison, the S&P 500 had returns of 27% in 2021, a decline of 19% in 2022, and a 24% increase in 2023. This indicates that Li Auto underperformed the S&P 500 in 2021 and 2022. The broader challenge of consistently outperforming the S&P 500 has been evident not only for Li Auto but also for other major stocks in the Consumer Discretionary sector, including heavyweights like Amazon, Tesla, and Home Depot, and even for tech giants like Google, Microsoft, and Apple.

In contrast, the Trefis High Quality (HQ) Portfolio, which consists of 30 selected stocks, has outperformed the S&P 500 annually over the same period. The HQ Portfolio's performance demonstrates that a group of high-quality stocks can deliver better returns with lower risk compared to the benchmark index.

Looking ahead, the Chinese EV market still holds potential despite the current economic challenges and global market weaknesses. Recently, China introduced new incentives, offering RMB 10,000 (approximately $1,410) to consumers who switch from gasoline cars to electric or low-emission vehicles. There are also reports that this subsidy could be doubled to 20,000 yuan ($2,800) per vehicle. Additionally, the trend towards premiumization in the Chinese EV market, with vehicles costing upwards of $30,000 gaining market share, could benefit Li Auto as it primarily competes in the premium segment. China's efforts to support the economy by cutting interest rates, coupled with Li Auto's focus on EVs equipped with gasoline-powered range extenders, position the company well in a competitive market.

Currently, Li Auto's stock is trading at around $18 per share, with a valuation of about 14 times the consensus 2024 earnings and 10 times the 2025 earnings. This is relatively reasonable given the projected revenue growth of over 15% this year and more than 35% next year.