Li Auto looks to be a long-term winner in the battle of Chinese EV makers.
Investors use a lot of valuation metrics and methodologies to pick stocks. In the end, earnings matter most.
On Wednesday, Citi analyst Jeff Chung raised his target price for the U.S.-listed American Depositary Receipts, or ADRs, of Chinese EV maker Li Auto (ticker: LI) to $65 from $54.30 and kept his Buy rating on the stock. Li ADRs closed on Wednesday at $41.84.
He added in his report that investors should sell shares of rival EV startup XPeng (XPEV). Chung rates XPeng stock Sell and has a $15 price target for the U.S.-listed ADRs. XPeng ADRs closed at $16.94 on Wednesday.
XPeng shares have enjoyed a renaissance lately, up about 20% over the past month, boosted by a surprise investment by Volkswagen (VOW.Germany). Volkswagen and XPeng will develop two EVs for the Chinese market. What’s more, the vehicles will use XPeng’s advanced driver assistance features.
One consequence of the new partnership, Chung writes, is that investors started to think about XPeng on a sum-of-the-parts, or SOTP, basis. That’s a methodology that values individual businesses within a company.
In the case of XPeng, it makes cars and it also makes autonomous driving software. The VW partnership shows that both businesses potentially have value. Other automakers, for instance, could license XPeng’s driver assistance tech.
But XPeng isn’t profitable and has captured less than 2% of the Chinese market for battery electric vehicles, or BEVs. About 3 million BEVs have been sold in China in the first seven months of the year, up about 27% over the same span of 2022. As the market develops some winners and losers are emerging.
Li looks like a winner. It has about 6% market share and is making money. What’s more, Chung says that investors will start to move back to price-to-earnings valuations in 2024 as overall market growth slows and automakers cut prices to boost demand, as Tesla (TSLA) did around the globe early in 2023.
Both things will make achieving profitability harder for XPeng. Wall Street projects the company will lose money through 2026. Li is expected to be profitable in 2023 and every year the Street forecasts thereafter.
Li stock is currently trading at about 29 times estimated 2024 earnings. Earnings are expected to grow at about 60% a year on average for the next couple of years. XPeng, of course, doesn’t have a PE ratio yet.
The rest of the Street aligns with Chung’s views. Overall, 90% of analysts covering Li shares rate them Buy. About 60% of analysts covering XPeng stock rate shares Buy.
The average analyst price target for Li stock is about $52, about $10 above where the ADRs trade. The average target for XPeng is about $15, about $2 below where the ADRs trade.
XPeng stock is down 0.94% on Thursday. Li shares have added 2.41%.
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