China is leading the race to transition towards EVs, and it is expected that other countries will follow suit. This is a great time to invest in electric vehicle companies and with growing competition in the sector, there are several companies to choose from. Tesla (NASDAQ:TSLA) is leading the race, but a number of other EV manufacturers, including Li Auto (NASDAQ:LI), are not far behind. The company holds a strong position in the market and has the potential to grow in the coming years. LI stock is up 110% over the past year.
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LI stock hasn’t had a smooth ride. It hit its low of $17 in May before rallying in July to $34. It has been trading in the $30s lately.
The correction took place due to concerns related to its valuation and the impact of the chip shortage. Now that the chip shortage is largely over, the stock has the potential to climb higher in the coming weeks. With that in mind, let’s take a look at the case for investing in LI stock.
Hong Kong Listing
The company received approval for an initial public offering from the Hong Kong Stock Exchange. Li is following in the footsteps of rival XPeng (NYSE:XPEV) which also listed its shares in Hong Kong.
Li Auto plans to list there through a dual primary listing which will open up its shares to investors in China. The company will use the proceeds for research and development and to expand its autonomous driving technologies.
Li Will Continue to Have Strong Deliveries in Q3
In the first and second quarter, the company delivered a total of 30,154 vehicles, and I strongly believe its deliveries will continue to be impressive in Q3, as the demand for its EVs is high.
Li Auto only has one model in the market, and it is cashing in on the success of that first vehicle. If the company manages to unveil its second model on schedule, the automaker should benefit from higher demand and strong deliveries. As a result, LI stock may reach new highs.
Strong Financials
In Q1, Li’s revenue soared 319% year-over-year. to $545.7 million. Given Li’s high delivery numbers for Q2, the company will likely continue reporting strong sales growth. It also had positive operating cash flow of $141.4 million in Q1.
The company reported a Q1 net loss of $54.9 million which was significantly lower than the loss that it had reported for the previous quarter. Li is widely expected to beat analysts’ average Q2 projections If the automaker manages to reduce its net loss, it will take a strong step forward to turning profitable well before its competitors.
The company has the potential to deliver healthy free cash flows over the next two to three years. It also raised $862 million in April 2021 through a convertible senior note offering, so it has enough liquidity to last it the next 12 months.
The Bottom Line on LI Stock
All in all, Li Auto has tremendous growth potential, making LI stock a buy before the automaker reports its Q2 results. The company’s Q2 results could very well push the stock higher.
With strong delivery numbers and its constantly narrowing net loss, Li Auto is making strong strides in the industry. It is a great EV play and will continue to remain a strong player in the sector.
The company may report a loss for the quarter, but with its strong sales and revenue potential, the company’s future has brightened. Changing hands for less than $34, LI stock looks undervalued and is a buy.
On the date of publication, Vandita Jadeja did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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