If you are an avid growth investor, the disruptive electric vehicle (EV) industry is one that should be on your radar. While EV stocks were on an absolute tear in 2020, concerns over steep valuations and rising competition have driven share prices lower in 2021. However, the pullback provides investors an opportunity to buy these stocks at lower valuations.
China is the largest EV market in the world, making stocks such as Li Auto (LI) and Geely (GELYY) interesting investments for 2021 and beyond. According to a research report from Canalys, China’s EV sales stood at 1.3 million units in 2020, accounting for 41% of total sales. In 2021, EV sales might grow by 51% year over year to 1.9 million units in China. Further, EV sales will account for over 10% of total passenger car sales by 2025, up from less than 3% in 2020.
Keeping these growth rates in mind, let’s see which between Li Auto and Geely should be part of your portfolio today.
Shares of Li Auto have gained close to 50% since its IPO last year. However, the stock is also down 45% from record highs. In the first quarter of 2021, the company reported sales of $545.7 million ahead of Wall Street revenue estimates of $522.5 million. However, its adjusted loss per share stood at $0.03 which was worse than consensus estimates of a loss of $0.02 per share.
Li Auto ended Q1 with 65 retail stores and 135 service centers allowing the company to increase its deliveries by 4x to 12,579 units.
Last month, the company also launched a new model of its best-selling car Li ONE. The latest vehicle is equipped with advanced safety features and will be a key revenue driver for the Li Auto. The company has forecast Q2 deliveries between 14,500 and 15,500 units, allowing it to generate anywhere between $609 and $651 million in revenue. Comparatively, analysts forecast Q2 sales at $704.5 million and have since revised their top-line estimates to $671 million in Q2.
However the company also disclosed it will be able to increase monthly deliveries to 10,000 units by the end of Q3. Analysts expect Li Auto to increase sales by 109% to $3.05 billion in 2021 and by 72% to $5.24 billion in 2022. This will allow the company to improve its bottom line from a loss per share of $0.28 in 2020 to earnings of $0.09 in 2022.
Geely is a legacy automobile company
Geely is an investment holding company and operates as an auto manufacturer in China. It is involved in the development, marketing and sales of automobiles and related spare parts in the country. Geely is an established auto manufacturer that produces sedans, sports utility cars and wagons.
A legacy manufacturer, Geely is now eyeing the high-growth EV space in China. In early 2021, the company partnered with Baidu where the two firms will be involved in the production of EV vehicles. While Baidu will provide autonomous and intelligent driving capabilities, Geely will use its design and manufacturing expertise.
However, Geely is growing at a far slower pace compared to Li Auto. In 2020, its annual revenue was $13.347, which was a 5.3% decline from 2019. Its EBITDA has also declined from RMB 17.24 billion ($2.69 billion) in 2018 to RMB 11.83 billion ($1.85 billion) in 2020. It means its EBITDA margin has declined from 16.2% to 12.8% in this period.
According to Geely, China’s weak passenger sales is the primary reason behind its top-line decline. Sales volume fell 5% year over year in 2020 after a 10% decline in 2019.
We can see that Li Auto is growing at a much faster rate compared to Geely. Li Auto is also relatively established in the EV space, while Geely is just starting out. Given these factors, I believe Li Auto is a better EV stock to buy right now.
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LI shares were trading at $25.15 per share on Friday morning, up $0.19 (+0.76%). Year-to-date, LI has declined -12.76%, versus a 13.15% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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