Li Auto's Steep Slide: Is the Market Missing a Value Opportunity?
NEW YORK – Li Auto Inc. (NasdaqGS: LI), once a darling of the electric vehicle sector, has seen its shares tumble more than 27% over the past year, significantly underperforming both the broader market and many of its peers. The stock closed recently at US$16.63, extending a prolonged downtrend that has left investors questioning the company's growth narrative amid fierce competition and macroeconomic headwinds in China.
However, a closer examination of the company's fundamentals reveals a more nuanced picture. According to a proprietary Discounted Cash Flow (DCF) analysis, Li Auto's intrinsic value is estimated at US$21.81 per share, implying the current market price represents a discount of approximately 24%. This model, which projects free cash flow through 2035 based on a blend of analyst estimates and historical trends, suggests the market's pessimism may have overshot.
"The sell-off has been brutal, but it's creating a clear disconnect between price and underlying value," said Michael Chen, a portfolio manager at Horizon Capital in Hong Kong. "While near-term execution risks are real, especially with model transitions and pricing pressure, the long-term cash flow potential isn't being priced in. This looks like a classic case of short-term noise drowning out a solid medium-term story."
The price-to-earnings (P/E) ratio offers another lens. Li Auto currently trades at 25.14x earnings, above the auto industry average of 17.93x but below its proprietary "Fair Ratio" of 29.27x—a metric adjusted for the company's specific growth profile and risk factors. This indicates the stock may also be undervalued on an earnings basis relative to its own potential.
The backdrop is critical. China's EV market is experiencing a punishing price war and slowing demand growth, pressuring margins across the board. Li Auto, known for its extended-range electric vehicles (EREVs), is also navigating its expansion into pure battery electric vehicles (BEVs), a capital-intensive move that has weighed on investor sentiment.
Investor Reactions: A Spectrum of Views
The valuation debate has sparked strong reactions from the investment community.
"The DCF model is a fantasy built on decade-long projections in the most volatile industry on earth," argued Sarah Jenkins, a former auto analyst turned vocal financial blogger. "Li Auto is burning cash, losing market share, and its core EREV technology is being sidelined by the pure EV shift. Calling this 'undervalued' is ignoring the burning platform. The discount is warranted, and it might get deeper."
In contrast, David Park, a retail investor focused on Asian tech, remains optimistic. "I've been averaging down. The brand loyalty is strong, their product pipeline for 2024 looks competitive, and they have a healthy balance sheet to weather the storm. The market is pricing in a worst-case scenario that likely won't materialize."
A more measured perspective comes from Arjun Mehta, a senior analyst at a Singapore-based wealth fund. "It's not simply undervalued or overvalued. The key is the narrative around its BEV execution. If they can successfully launch their Mega van and lower-cost BEV models without destroying margins, today's price will look cheap. If they stumble, the downside remains. It's a high-risk, high-potential-reward situation that the current price partially reflects."
As the EV landscape continues to shift, Li Auto stands at a crossroads. The significant gap between its market price and analyst-derived fair value presents a compelling puzzle for value-oriented investors, even as the company's strategic bets on new technology and models introduce substantial uncertainty. The coming quarters' delivery figures and margin reports will be critical in determining whether the current price represents a moment of market overreaction or a prudent reassessment of long-term risks.
This analysis is based on publicly available data and valuation models. It is for informational purposes only and does not constitute financial advice. Investors should conduct their own research or consult a financial advisor.