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Last year was a mixed one for Chinese electric vehicle (EV) companies. Even with strong financial performances, stock upsides were capped with regulatory concerns. Additionally, chip shortages broadly impacted EV stock sentiments. However, I believe that Li Auto (NASDAQ:LI) stock is among the top EV stocks to consider for 2022 and beyond.
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Over a 12-month period, LI stock has trended higher by 12%. A strong breakout on the upside seems imminent. Let’s take a look at some of these potential catalysts.
Growth Trajectory for LI Stock
Let’s start with the company’s vehicle delivery growth trajectory. For the third quarter of 2021, Li reported delivery of 25,116 vehicles. On a year-over-year (YOY) basis, deliveries were higher by 190%.
Recently, the company reported deliveries for the fourth quarter of 2021. On a YOY basis, deliveries surged by 143.5% to 35,221. Clearly, even as the stock remains relatively sideways, deliveries growth has impressed.
There is one factor that makes this growth trajectory even more impressive — The company launched the Li One model in November 2019. Growth has been entirely driven by the first launch. Of course, the company launched the latest version of the Li One in May 2021.
Over the last two years, the company has expanded presence to 206 retail stores in 102 cities. Aggressive expansion in terms of visibility has helped boost LI stock’s growth.
Strong Financial Profile
Another key reason to like Li Auto is the company’s strong financial profile.
First, Li reported cash and equivalents of $7.6 billion as of September 2021. The company seems fully financed for the next 18-24 months. Li Auto is already working on expanding the product line. The financial flexibility will help in aggressive investment in innovation. For Q3 2021, the company reported research and development expense of $137.9 million. On a YOY basis. R&D expense was higher by 165.6%.
Further, for Q3 2021, Li reported operating and free cash flow (FCF) of $336.7 million and $180.8 million respectively. On a sustained basis, Li Auto has reported positive operating and free cash flows. If we annualized Q3 2021 numbers, the company has the potential to deliver around $730 million in FCF. The key point here is that Li is generating ample cash flows to invest in expansion from operations. No further equity dilution would positively impact LI stock’s upside.
It’s also worth noting that for Q3 2020, Li reported vehicle margin of 19.8%. In the last quarter, vehicle margin expanded to 21.1%. With operating leverage, margin expansion is likely to ensure further upside in cash flows.
Strong Growth To Sustain
In October 2021, Li Auto announced commencement of construction of its Beijing manufacturing base. The plant is scheduled for completion in 2023.
Additionally, in November 2021, the company announced the acquisition of 100% equity interest in Changzhou Chehejin Standard Factory. This will also expand the company’s manufacturing capabilities.
The manufacturing facility expansion will support growth as new premium battery electric vehicle (BEV) models are launched. It’s worth noting here that the company plans to focus on smart cockpit and advanced driver-assistance systems (ADAS) technologies for future models.
With technology being the driving factor, vehicle delivery growth is likely to remain strong in the next few years. Further, positive industry tailwinds are likely to sustain through 2030.
Another point to note is that Nio (NYSE:NIO) and XPeng (NYSE:XPEV) have already expanded into Europe. It’s very likely that Li Auto will foray into overseas markets in 2022 or 2023.
In August 2021, it was reported that Li Auto is exploring the possibility of an overseas production base. Possible international expansion is another catalyst for strong growth in the coming years.
Concluding Views on LI Stock
LI stock seems well positioned for break-out on the upside in 2022. The company has witnessed strong deliveries growth that has been associated with sustained upside in FCF.
Li Auto’s expansion of their manufacturing base, possible international forays and new model launches are the company’s strongest potential catalysts for growth acceleration. I believe that LI stock has the potential to double from current levels in 2022.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
The post Li Auto Stock Has Significant Upside Potential in 2022 and Beyond appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
