LI Stock Investors, Take Note: What to Watch for on August 8

Li Auto (NASDAQ:LI) stock could be on the move as the company is due to report earnings Aug. 8.

Analysts expect about 24 cents/share of earnings on revenue of $3.7 billion. Those are huge gains from a year ago, when there was a loss of 3 cents per share on revenue of $1.22 billion. Things are expected to only get better from here for Li stock.

This is what ramping up production is supposed to look like. Mass production turns losses into profit, and growth is off the charts. It’s what justifies a stock jumping over 100% this year and compares favorably to Tesla (NASDAQ:TSLA).

But Li’s 2023 performance has done something else. It has changed the game in electrification.

A Closer Look at Li Stock

Li has grown fast thanks to a hybrid design where a gas engine powers an electric battery and motor. This is a Plug-In Hybrid Electric Vehicle. It differs from Toyota (NYSE:TM) hybrids by putting the electric motor first, allowing the car to be recharged overnight.

This solves problems that have kept Americans away from electric cars like the Ford Motor (NYSE:F) F-150. Lithium ion batteries are heavy. Their energy density is low.

Americans prefer huge, roomy cars. Adding electric batteries and motors to the existing framework leaves you with an expensive vehicle, and low range, that feels more like a semi-truck to the roadbed than a passenger car.

A loaded Tesla CyberTruck will weigh 10,000 pounds.

Seeing the success of Li, American companies have responded. Ford says it will now make more hybrids.

Back in China, meanwhile, Li isn’t the only success story. BYD (OTCMKTS:BYDDF), which started life as a battery maker backed by Berkshire-Hathaway (NYSE:BRK-A) (NYSE:BRK-B), is doing even better than Li. It’s doing it with smaller vehicles that can have acceptable range, built with lower costs because BYD makes its own batteries.

Stepping Up

Investors are giddy about Li Auto’s plans for stepping up production. Li will also offer full-electrics in 2025, using “semi-solid” batteries from CATL and 800-volt charging stations.

The problem is that this keeps Li out of the center of the market. Building new, higher voltage charging stations will be expensive, and could delay Li’s export drive.

Li is also emphasizing its self-driving features in the new models. While Li prices are coming down, they will remain on the high end.

Between them, Li and BYD threaten to squeeze Tesla out of a market it created and long dominated. Chinese buyers prefer domestic models, just like Americans do.

The problem for Li stock is that this leaves the company with the smaller end of the resulting stick.

Cadillacs always made more money per-car for General Motors (NYSE:GM) than Chevys did. But the Chevy made it up on volume. Most car buyers are middle class.

Then there are Li’s ties to Xi Jinping’s government. It’s not formal. Every Chinese company is tied to the government. But Li’s strategy of building family SUVs that only top cadres can afford is limited both by the number of top cadres and China’s growing economic problems.

The Bottom Line

Analysts often make the mistake of confusing will with organization.

It’s the companies that don’t insult their customers, and the governments who don’t insult their citizens, that succeed in the long run.

This makes me fearful for Li Auto. Its electrification announcements, especially the need for new chargers, tie it completely to the Chinese government. That looks increasingly like a one-man show, and the man has lost the plot. 

It’s the same problem I have with Tesla. There is no such thing as a one-man company, any more than there is a one-man government. Cracks are showing at Tesla and they’re showing in China, too. Betting cracks won’t widen without wrenching change is a bad bet.

As of this writing, Dana Blankenhorn did not hold (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 Publishing Guidelines.

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