On Monday, CFRA lowered its rating on Li Auto (NASDAQ: NASDAQ:LI) from Sell to Strong Sell, maintaining a price target of $15.00. The firm's analyst cited the electric vehicle company's profit margin weakness as a key factor for the downgrade, despite Li Auto achieving a net profit of 2.8 billion Chinese Yuan in the third quarter of 2024, which remained stable compared to the third quarter of 2023. Revenue growth for the company was reported at 24% for the same period.
The analyst's valuation is based on a projected price-to-book (P/B) ratio of 1.5 times for the year 2025, which represents a significant decrease from Li Auto's average P/B ratio of 4 times from 2020 to 2023. This adjustment aims to reflect the challenges Li Auto faces in maintaining its profit margins.
In the face of intense competition within China's electric vehicle market, CFRA expressed a neutral stance on Li Auto's fundamentals. The market dynamics are expected to constrain average selling price increases while simultaneously driving up research and development and marketing costs. This is particularly relevant as Li Auto plans to implement multiple product strategies over the next two years.
Despite anticipating revenue growth to stay above 70% for 2024-2025 due to new model releases, CFRA remains cautious about Li Auto's profitability outlook. The firm has reiterated its earnings per share (EPS) estimate for 2024 at 8.29 Yuan and has slightly reduced the 2025 EPS forecast to 11.71 Yuan from the previous estimate of 12.49 Yuan.
In other recent news, Li Auto, a key player in China's New Energy Vehicle market, reported significant growth in its third-quarter earnings call for 2024. The company's vehicle deliveries saw a 45.4% increase, exceeding 152,000 units and pushing its market share to 17.3%. This surge also led to a rise in total revenues, which climbed to RMB 42.9 billion ($6.1 billion), marking a 23.6% increase from the previous year.
Li Auto's CEO, Xiang Li, also announced that the company's cumulative vehicle deliveries have now surpassed the 1 million mark, an achievement reached faster than its peers in the NEV sector. Looking ahead, Li Auto plans to deliver between 160,000 and 170,000 vehicles in Q4, with projected revenues of RMB 43.2 billion to RMB 45.9 billion.
The company's retail and service network has expanded to 479 stores and 436 service centers, and it received the highest AAA ESG rating from MSCI for the second consecutive year. However, it's worth noting that SG&A expenses increased by 32.1% year-over-year, primarily due to higher employee compensation linked to performance-based share awards. Lastly, free cash flow decreased to RMB 9.1 billion ($1.3 billion) from RMB 13.2 billion the previous year.
InvestingPro Insights
Recent data from InvestingPro offers additional context to CFRA's analysis of Li Auto. Despite the downgrade, Li Auto's financial metrics present a mixed picture. The company's P/E ratio stands at 17.2, which, when considered alongside its PEG ratio of 0.31, suggests the stock might be undervalued relative to its growth potential. This could be particularly interesting given the analyst's concerns about profit margins.
Li Auto's revenue growth remains strong, with a 42.25% increase over the last twelve months, aligning with CFRA's expectation of continued robust revenue growth. However, the stock has experienced significant volatility, with a 13.97% decline in the past week and a 14.43% drop over the last month, reflecting the market's current skepticism.
InvestingPro Tips highlight that Li Auto holds more cash than debt on its balance sheet and that cash flows can sufficiently cover interest payments. These factors could provide the company with financial flexibility as it navigates the competitive landscape and implements its product strategies.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Li Auto, providing a deeper understanding of the company's financial health and market position.
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