Li Auto (NASDAQ: LI) stock surged 30% last month after it reported tremendous results for 2023 -- sales up 173.5% year over year, free cash flow growing to $6.2 billion, gross profit margins expanding, and net income flipping from a 2022 loss to a 2023 profit of $1.7 billion. No sooner had this Chinese automaker stomped the accelerator, though, than investors slammed on the brakes.
Worries that sales might slow in Q1 2024, reinforced by a weak February deliveries report, sent Li stock tumbling. But according to investment banker Morgan Stanley, this sell-off just set up Li stock for a rebound. One year from now, Li shares should be worth as much as $74 apiece, and if that happens, investors who bought at Tuesday's closing price would get an 86% profit.
Is Li Auto stock a buy?
Morgan Stanley is taking an aggressive position here, but it's not without merit. At $40 billion in market capitalization, Li stock does look undervalued relative to its $6.2 billion in free cash flow. The stock's price-to-free cash flow ratio is a cheap 6.5. For comparison, Tesla(NASDAQ: TSLA) stock generated only about $4.3 billion in FCF last year, but its stock costs $565 billion, yielding a P/FCF of 131.
True, Li is predicting a slowdown in sales in 2024, but so is Tesla, which told investors in January that its "vehicle volume growth rate may be notably lower than the growth rate achieved in 2023." Viewed in that light, Li's prediction of 90% unit volume growth in Q1 -- while slower than what the stock enjoyed in 2023 -- still looks pretty good.
It's also worth pointing out that Li only started generating revenue five years ago, versus 16 years for Tesla. Li's a much younger company, and its growth curve is just getting starting, which suggests the company has a lot more room to grow over the next three to five years.
As things stand now, Li looks very much like a growth stock selling for a value stock price.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tesla. The Motley Fool has a disclosure policy.
