Shares of Chinese EV-maker Li Auto Inc. (LI) have rallied 63.8% over the past month to close yesterday’s trading session at $30.88. This price surge can be primarily attributed to investors’ interest surrounding the company’s launch of 2021 Li ONE on May 25, 2021, which features enhanced upgrades, including an enhanced NEDC range of 1,080 kilometers. However, LI continues to face intense competition from other Chinese EV makers such as XPeng Inc. (XPEV) and NIO Inc. (NIO).

It is currently trading 35.3% below its all-time high of $47.70 which it hit on November 24, 2020. The company delivered 4,323 Li ONEs in May 2021 compared to 5,539 in April 2021. LI’s total revenue declined 13.8% sequentially to $545.68 million for the first quarter ended March 31, 2021. Also, its net loss for the quarter increased 54% year-over-year to $54.94 million. Moreover, the company’s production continues to be impacted by the global semiconductor shortage. So, LI’s near-term prospects look bleak.

Here’s what I think could shape LI’s performance in the near term:

Global Semiconductor Shortage

The global chip shortage has been affecting several industries. However, the automotive industry has been a major sufferer witnessing significant production setbacks due to the shortage since late last year. According to industry forecaster LMC Automotive, the semiconductor shortage could continue to be a problem for the industry at least through the 2nd half of 2021 and may last through 2022. So, LI could continue to face production challenges.

Debt Offering

LI announced on April 12, 2021, that it completed the offering of $862.5 million in aggregate principal amount of its 0.25% convertible senior notes due 2028. The company is expected to use the net proceeds for research and development of new vehicle models and technologies, and working capital, and other general corporate purposes. However, this news was not well received by investors, as this is expected to dilute the value of LI’s shares.

Lofty Valuation

In terms of forward EV/S, LI’s 7.13x is 340.1% higher than the industry average of 1.62x. The stock’s forward P/S of 8.51x is 544.7% higher than the industry average of 1.32x. Its forward Price/Book and P/CF of 5.58x and 38.02x are also higher than the industry averages of 3.71x and 14.37x, respectively.

POWR Ratings Reflect Bleak Prospects

LI has an overall rating of F which equates to a Strong Sell in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. LI has a D grade for Value, in sync with its higher-than-industry valuation ratios.

The stock has a D grade for Growth. This is justified given that its EPS is expected to remain negative for the current quarter ending June 30, 2021, and in fiscal 2021. LI also has a D grade for Sentiment, consistent with unfavorable analyst sentiment.

Moreover, LI has a D grade for Quality. This is in sync with its trailing-12-month gross profit margin of 17.22%, which is 50.2% lower than the industry average of 34.57%. Its trailing-12-month ROCE and ROTA are negative compared to the industry averages of 11.85% and 3.72%, respectively.

Out of 57 stocks in the Auto & Vehicle Manufacturers industry, LI is ranked #45. Click here to see LI’s ratings for Stability and Momentum as well.

Better than LI: Click here to access 24 top-rated stocks in the same industry.

Bottom Line

Besides Li ONE, LI said that it aims to expand its product line by developing new vehicles including BEVs and EREVs, but the development process is expected to take more time owing to the global semiconductor shortage. The stock is overdue for a price correction as it looks significantly overvalued given that its EPS is expected to remain negative in the upcoming quarters and its vehicle deliveries decreased last month. So, it is wise to avoid the stock now. 

LI shares were trading at $30.20 per share on Friday afternoon, down $0.68 (-2.20%). Year-to-date, LI has gained 4.75%, versus a 11.84% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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