Li Auto (NASDAQ:LI) is a Chinese electric vehicle (EV) stock that seems to be too cheap. Here is the reason. It trades for just 4.4 times forward sales, according to Seeking Alpha’s compilation of analysts’ estimates. But its peers in the Chinese EV market have much higher valuations. There doesn’t seem to be any good reason why Li stock should not have a similar high valuation.
A front view of the Li Xiang One SUV from Li Auto (LI).
Source: Carrie Fereday / Shutterstock.com
We’ll get to the bottom of this in two steps. First, we’ll take a look at how Li compares to several other EV manufacturers. Second, we’ll model what Li could look like in the future.
For example, Nio (NYSE:NIO) trades for 7.65 times year-end 2022 forecast sales. This is 74% higher than Li Auto’s valuation. This really does not make any sense.
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Li Auto’s Price-to-Sales Comps
Perhaps it is this. Nio is expected to make $8.76 billion in sales in 2022 and has a $67.44 billion market value. Li Auto is forecast to have $5.1 billion and has a $22 billion market value. That implies Nio has a 72% higher sales level. But it makes no sense to give NIO stock a 74% higher price-to-sales multiple just because it has 72% higher sales.
For example, based on this metric, Li Auto should have a market value of $39 billion, which is 7.65 times $5.1 billion in forecast sales. That is 77% higher than its present market value of $22 billion.
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Here is another anomaly. Xpeng (NYSE:XPEV), another Chinese EV maker, has a $27.33 billion market value, higher than Li Auto’s $22 billion. But XPeng is forecast to make just $4.25 billion in sales by Dec. 2022.
Therefore, this gives Xpeng a much higher price-to-sales multiple of 6.6, compared to Li Auto’s 4.4 multiple. Moreover, its $4.3 billion in sales is lower than Li Auto’s $5.1 billion forecast sales. And XPEV stock has a $5 billion higher market value than Li Auto’s $22 billion market value.
And it is not as though any of these companies are already super profitable. None of them are expected to make serious profits until after 2022. In fact, one analyst at Seeking Alpha indicates that Li Auto is forecast to make $164 million in free cash flow during 2022.
So it seems that we can forecast that Li Auto is worth much more. But how much?
Valuing LI Stock
There are several ways we could derive a value for LI stock. First, let’s look at the comps. As indicated above, its peers have higher price-to-sales multiples. Let’s take an average of all three and apply that to Li Auto.
Nio has a price-to-sales ratio of 7.65, Xpeng is at 6.6, and Li Auto is at 4.4. The average of all three of these is 6.22. Therefore, assuming Li Auto hits its $5.1 billion sales forecast, the market value should now be $31.7 billion.
This represents a potential gain of 44% over today’s market value of $22 billion. In other words, Li stock should be worth $35.94, which is 44% more than its June 3 price of $24.96.
Another way is to use its forecast free cash flow (FCF) and value the stock accordingly. For example, let’s assume it hits $164 million in FCF this year and 50% more by 2022, or $246 million. Using a 1% FCF yield, the stock should have a $24.6 billion market value. That represents a potential gain of 11.8% over its $22 billion market value. It puts LI stock at a value of $27.90 per share.
Lastly, let’s look at its earnings per share projections. Analysts estimate that by 2024 Li Auto will make 24 cents per share, according to Seeking Alpha. Tesla (NASDAQ:TSLA) trades for 85.6 times forward earnings.
Let’s use a 25% discount and apply that to LI stock. That would give it a fair value estimate of 64 times earnings. Therefore, 64 times 24 cents EPS equals $15.36 per share. This is a 38.5% discount to its present price of $24.96.
What To Do With LI Stock
We now have three valuation methods for LI stock. Using price-to-sales comps the stock is worth $35.94. Using a FCF method and FC yield, it is worth $27.90. Lastly, using a forward P/E model, LI stock is worth $15.36.
The average of all three of these methods is a price target of $26.40. That represents a potential gain of just 5.8% over its present price of $24.96.
However, we do not have the same degree of confidence in all three of these methods. For example, it is much easier to measure and forecast future sales than free cash flow and earnings. Therefore let’s weigh them differently.
For example, a more appropriate valuation would give a 60% weight to the price-to-sales model, and 20% each to the other two models. Here is how that works out: (60% x $35.94) + (20% x $27.90) + (20% x $15.36). This works out to the sum of $21.56 + $5.58 + $3.07. The total weighted average price target is $30.21. That represents a potential gain of 21% in LI stock.
We used three models, including comps, FCF and earnings estimates, and weighted these three models. As a result, LI stock is worth 21% more at $30.21.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
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