Spurred in part by analysts (like me) “discovering” it, Li Auto (NASDAQ:LI) stock is one of China’s hottest 2023 plays.
Since the start of this year, shares in Li are up 75%, five times more than the S&P 500. Investors now pay over six times revenue for a company that has yet to make a dime.
Growth is the reason for that. Li revenues nearly doubled in the first quarter, with gross margins of 20%. Growth accelerated in the second quarter, with June car deliveries 150% ahead of last year.
What could possibly go wrong?
A Closer Look at Li Stock
I admit to being a fan of Li Auto.
If this were an American company, this stock would be a bargain. Its plug-in hybrids are a genuine contender against Tesla (NASDAQ:TSLA).
They use gasoline to power a smaller battery while delivering size and luxury.
When I started writing about Li regularly, I was alone in its corner. Now the table is getting crowded. Crypto traders are being lured to Li’s side. Other writers are seeing its strong cash flow and margins.
Li Warnings
When any investment makes a bull run, you need to think about taking profits. It’s as true with Li stock as it is with Nvidia (NASDAQ:NVDA).
I see two risks. The first, and most important, is China. Li is an entirely Chinese company. It hews to the party line. It only sells its cars there.
China is having trouble right now. The economy is slowing, prices are falling. Efforts to turn it around with lower interest rates are not working.
The overheated property market is even requiring stimulus. You can now get 7.2 Chinese Yuan for a dollar. That’s up 7% in six months. That discounts your gains in any Chinese stock, including Li.
Given the economic weight, Li may also reach a growth limit. Li’s focus is on the high end of the market, on couples with ample income and often multiple children.
Those numbers are not growing. Li has yet to announce an export strategy. Even though the Li9 might look good in my driveway, it’s not coming here.
The second risk is Toyota (NYSE:TM). The Japanese company is a laggard in the EV market, but its gas-first hybrids dominate the U.S., with a 65% market share. (My 2022 Corolla hybrid gets 53.6 miles per gallon.)
The Japanese car giant is now ramping up production of Plug-in Hybrids, like the Li9, and is finding success. It’s part of a long-term plan to become a power in electrics and maintain profitability.
Toyota’s plug-in RAV4 costs $43,000 in the U.S. That’s barely half what the Li9 goes for in China. That’s just one company. As Li looks to expand outward, it’s going to face a ton of competition.
The Bottom Line
If you bought Li stock early this year, it’s time to take something off the table.
No stock goes to the Moon. This is especially true for a stock serving a troubled market, like China.
If you’re not yet in Li stock, you can afford to wait. Bearishness concerning China is going to increase. Uncertainty over its priorities, whether it moves toward war or peace, is going to weigh on all stocks there.
The luxury end of the market is also very crowded. Even Teslas are sitting on docks, requiring discounts to move. Profitability is going to decline. After the market absorbs this reality, Li Auto is a good company.
Just not at these prices.
As of this writing, Dana Blankenhorn held a LONG position in NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
