Valuation Metrics and the Importance of Earnings

Investors utilize various valuation metrics and methodologies when selecting stocks. Ultimately, earnings play a crucial role in this process.

Li Auto: An Upgraded Target Price

Citi analyst Jeff Chung has recently raised his target price for the American Depositary Receipts (ADRs) of Chinese electric vehicle (EV) manufacturer Li Auto (ticker: LI). The target price has been increased from $54.30 to $65, while Chung maintains his Buy rating for the stock. As of Wednesday, Li ADRs closed at $41.84.

Suggested Sale of XPeng Shares

Additionally, Chung recommends that investors sell shares of rival EV startup XPeng (XPEV). With a Sell rating on the stock, Chung has set a target price of $15 for the U.S.-listed ADRs. On Wednesday, XPeng ADRs closed at $16.94.

XPeng's Recent Surge and Partnership with Volkswagen

XPeng shares have experienced a notable upswing, rising approximately 20% over the past month. This surge was further propelled by an unexpected investment from Volkswagen (VOW.Germany). As part of the partnership, Volkswagen and XPeng will collaborate on developing two EVs for the Chinese market. Notably, these vehicles will integrate XPeng's advanced driver assistance features.

The Significance of XPeng's Partnership with Volkswagen

According to Chung, this new partnership has led investors to consider XPeng from a sum-of-the-parts (SOTP) perspective. This valuation methodology assesses the individual businesses within a company.

In the case of XPeng, the company not only manufactures cars but also develops autonomous driving software. Through the collaboration with Volkswagen, the value of both these businesses becomes evident. Moreover, other automakers may potentially seek to license XPeng's driver assistance technology.

Li Emerges as a Strong Competitor in China's EV Market

As the Chinese market for battery electric vehicles (BEVs) continues to grow, a clear divide between winners and losers is becoming evident. XPeng, one of the major players in the industry, is currently facing challenges in terms of profitability and market share. With less than 2% of the market captured, XPeng's future success is uncertain.

On the other hand, Li is emerging as a winner in this competitive landscape. With a market share of approximately 6%, Li is not only making money but is also projected to be profitable in 2023 and beyond. This positive outlook is attributed to the company's ability to navigate market dynamics and its commitment to offering competitive prices to boost demand—a strategy previously demonstrated by Tesla in early 2023.

The market is also showing confidence in Li's potential. Analysts anticipate steady growth for the company, with earnings expected to increase by an average of 60% annually over the next few years. In comparison, XPeng does not yet have a price-to-earnings (PE) ratio, making its profitability outlook uncertain.

Analysts concur with the notion that Li is a promising investment opportunity. Currently, 90% of analysts covering Li shares rate them as a Buy, while about 60% of analysts covering XPeng stock hold a similar view.

Looking at the projected stock prices, Li has an average analyst price target of around $52—approximately $10 higher than its current trading price. XPeng, on the other hand, has an average target price of around $15, which is approximately $2 below its current trading price.

In premarket trading on Thursday, XPeng stock saw a modest increase of 2.5%, while Li shares experienced a more substantial gain of 4.7%. Furthermore, futures for the S&P 500 and Nasdaq Composite also showed positive signs, with increases of 0.5% and 0.6% respectively.

Considering all these factors, it is apparent that Li is positioned as a strong contender in the Chinese EV market. With the potential for profitability and positive market sentiment, Li's future prospects are looking promising.