Tesla was the talk of the town Wednesday after the electric vehicle (EV) maker announced weak earnings but also said it would send more affordably priced EVs to market as soon as possible. Earlier in the week, however, it was a different electric carmaker -- China's Li Auto (LI 4.29%) -- that caught investors' attention.
On Monday, Citigroup tweaked its price target lower on Li Auto stock to $43.60. Despite the lower price target, Citi insists Li stock is still a buy (the new price target implies a 73% upside over the next 12 months from the current price).
What's going on here?
Is Li Auto stock a buy?
Citi's note keys off of Li's announcement that its new L6 electric SUV -- which launched last week and is now Li's least expensive model -- collected only 10,000 pre-orders in its first three days on the market. Citi contrasted the L6's sales performance with the company's introduction of its L9 electric SUV two years ago, which cost more but collected 3 times as many pre-orders.
This is probably not great news for Li. (Hence the lower price target.) But in its note, Citi's analyst raised the question of whether the news is as bad as it seems. Deposits on L9 pre-orders, for example, were refundable (if a buyer changed their mind). Citi wasn't sure if the same is true for L6 pre-orders. And if it isn't, then this might not be an apples-to-apples comparison.
Meanwhile, when assessing the bigger picture, it's become increasingly obvious over the past few months that electric car sales are slowing down globally. So even if the L6 isn't selling like hotcakes right now, well, nothing is. This isn't a Li-specific problem.
Furthermore, despite this slowdown, most analysts expect the company to grow its earnings by more than 19% annually over the next five years. For a stock that costs less than 15 times earnings today (and less than 4 times free cash flow), that still makes for a compelling case that Li Auto is cheap and should be bought.
Citi is right to recommend it.
